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There are a few strategies that can help you take control of overwhelming debt — including debt settlement and debt consolidation. If you’re weighing these two options, it’s important to fully understand the difference between them as well as their pros and cons.

Here’s what to know about debt settlement vs. debt consolidation and how to choose which is right for you. 

What is debt consolidation?

Debt consolidation is when you use a new loan to pay off your debts, leaving you with just one loan and payment to manage. Consolidating your debt might also get you a lower interest rate than you’re currently paying, depending on the type of consolidation loan and your credit.

How it works

To consolidate debt, you’ll take out a new loan — like a personal loan or balance transfer credit card — and use the funds to pay off your debt. This means your original creditors will be paid off in full, and you’ll make just one monthly payment toward your consolidation loan.

This new loan will come with a different rate and repayment term. For example, if you use a personal loan to consolidate credit card debt, you’ll make fixed monthly payments — typically for one to seven years, depending on the lender.

Pros

  • Could get you a lower rate: If you have good credit, you might qualify for a lower interest rate on a debt consolidation loan than what you’re currently paying. This can save you money on interest and potentially help you pay off your debt faster.
  • Might reduce your payments: You can opt to extend your repayment term when you consolidate debt. This will likely reduce your monthly payments to fit more comfortably into your budget. Just keep in mind that choosing a longer term means you’ll pay more in interest over time.
  • Can simplify repayment: It can be hard to keep track of multiple debts with different rates and payments. Consolidating your debt means you’ll have just one payment to manage.
  • Could help to improve your credit: Payment history makes up 35% of your FICO credit score. So while applying for a new loan could cause a slight, temporary drop in your credit score, making on-time payments on the loan might help to improve your score in the long run. 

Cons

  • Doesn’t reduce your debt: While consolidation can help to simplify your repayment, it won’t reduce the amount of debt you owe — though you might save money on interest if you lower your rate. If you can’t afford the monthly payments, consolidation might not be the right solution for you.
  • Can come with fees: Many lenders charge fees on debt consolidation loans. For example, personal loans can come with origination fees while balance transfer cards generally have balance transfer fees. These can increase your overall costs.
  • Usually need good credit: You’ll typically need good to excellent credit to qualify for a debt consolidation loan. A good credit score is usually considered to be 670 or higher. While some lenders offer debt consolidation loans for bad credit, these typically come with higher rates than good credit loans — which might defeat the point of consolidating your debt in some cases.
  • Doesn’t fix bad financial habits: Consolidation might help you manage your debt, but it won’t solve the problems that might have led to an overwhelming amount of debt in the first place. You’ll need to address these issues in order to avoid ending up in the same place in the future.

What is debt settlement?

Debt settlement is the process of negotiating with your creditors to accept a payoff amount that’s less than what you owe. You can do this yourself or work with a third-party, for-profit company to handle it for you. 

Note that debt settlement is generally only an option for unsecured debt without collateral, like credit cards or personal loans.

How it works

If you pursue debt settlement, you’ll approach your creditors and try to persuade them to accept a reduced payoff amount. This generally involves offering a lump-sum payment to clear the debts.

You can also hire a debt settlement company to negotiate with your creditors for you. In most cases, the company will encourage you to stop making your monthly payments on your debt as they try to negotiate with your creditors. While this might incentivize your creditors to accept a lower payoff amount, it can also severely damage your credit. 

In the meantime, you’ll make deposits into an escrow account managed by the debt settlement company until you’ve saved enough to cover a settlement. If the agreed settlement amount is accepted, your original creditor will receive the funds and consider the debt resolved. 

Keep in mind that your creditors might not agree to a settlement. This means you’ll still owe your full amount of debt along with any interest and fees that racked up during the negotiations.

Pros

  • Can reduce your owed amount. Settling debt for less than what you owe means you’ll keep more money in your pocket.
  • Could be a faster payoff option. A settlement involves saving up toward one lump payment that’s ideally lower than your total owed balance. This means you might be able to get rid of your debt faster than if you’d paid it off according to your original loan agreement.
  • Might help you avoid bankruptcy. If a debt settlement agreement is successful, you can avoid having to file for bankruptcy along with its long-term impact on your credit.

Cons

  • Creditors might not agree: If your creditors don’t agree to settle, you’ll still have to pay the debt you owe. Plus, your balance might have ballooned thanks to unpaid interest and late fees.
  • Negatively affects your credit: In many cases, a key strategy to debt settlement is not making payments to creditors until they agree to a lower payoff amount. Missing payments while a settlement is being negotiated — which can take several months or even a few years — can severely damage your credit.
  • Could come with high fees: Many organizations that offer debt settlement services are for-profit companies that charge fees for their help. These fees are typically 15% to 25% of the total amount of debt you want to settle — not how much you end up saving if the settlement is successful. 
  • Might have tax implications: If you settle a debt for less than you owe, the IRS might consider the amount written off as taxable income — though there are some exceptions for certain types of debt forgiveness or cancellation. This means you could end up with a higher tax bill later on.

Should you consolidate or settle debt?

Whether you should consolidate or settle debt will depend on your individual circumstances and financial goals. 

Debt consolidation can be a good option if you have high-interest debts, such as credit cards, and you can obtain a consolidation loan with a significantly lower interest rate,” says Leslie Tayne, founder and managing director of Tayne Law Group.

Remember that debt consolidation is a restructuring option — it won’t change the amount you owe. This means it can also be a reasonable approach if your unpaid debt isn’t excessively high, and the monthly payments will fit comfortably into your budget. 

However, if you have a substantial amount of debt, can’t afford the minimum payments and maybe are considering bankruptcy, then debt settlement might be a better option. Just remember that debt settlement isn’t guaranteed to be successful.

“Debt settlement can be a less drastic option than bankruptcy, though it does result in damage to your credit score,” says Tayne. “However, there may be fewer long-term consequences [compared to bankruptcy].”

Other options to help tackle debt

If either debt consolidation or settlement doesn’t seem right for you, here are some other options to consider:

Credit counseling

Offered by most debt relief companies, credit counseling can help you learn about money management tools and explore debt repayment strategies unique to your situation. To find a certified credit counseling agency — such as the National Foundation for Credit Counseling — you can visit the Department of Justice’s .

Debt management plan

Debt management is also provided by several debt relief companies, and it involves consolidating your debt under a single repayment plan. You’ll make fixed monthly payments to the company, which will send funds to your creditors on your behalf. It usually takes three to five years to successfully complete a debt management plan.

Note that participating creditors often provide benefits, such as lowering rates or reducing or waiving fees, which can save you money over time. 

Debt avalanche method

If you decide to pay off your debt on your own, there are a few strategies that could make it easier, such as the debt avalanche method. With this method, you’ll make the minimum payments on each of your debts while allocating any extra funds to the debt with the highest interest rate. After paying off that debt, you’ll move on to the debt with the next-highest rate — and so on until all of your debts are repaid. 

While it can take time to see any movement in your debt with this method, it can help you save money on interest charges.

Debt snowball method

With this method, you’ll focus on repaying your account with the smallest balance first while making the minimum payments on your other debts. Afterward, you’ll focus on the account with the next-smallest balance — continuing until all of your debts are repaid. 

The debt snowball method likely won’t save you as much in interest as the debt avalanche, but it can be a good choice if you’re motivated by small wins.

Frequently asked questions (FAQs)

Debt settlement typically has a negative impact on your credit. This is because settlement programs often require you to stop making payments to your creditors. These missed payments will be reported to the credit bureaus, and in turn, your credit score will likely drop.

Additionally, if a debt is successfully settled, it will show as being settled for less than what you owed on your credit report. This will remain on your credit report for seven years — either after the original delinquency date if you were late on payments or after the settlement date if you missed no payments. Note that while settling a debt is considered negative, it likely won’t hurt your credit as much as failing to repay the debt at all.

A debt consolidation loan — such as a personal loan — will stay on your credit report throughout your repayment period. Additionally, any missed or late payments on your loan will stay on your credit report for up to seven years.

Once you’ve paid off the loan, it will remain on your credit report as a closed account for up to another 10 years.

Whether or not you should work with a debt consolidation company will depend on your individual circumstances and financial goals. If you’d like to consolidate your debt, you’ll need to work with either a debt relief organization or a lender to take out a new debt consolidation loan. It’s a good idea to shop around and compare your options with as many companies as possible. This way, you can find the right debt consolidation option for your needs.

Be sure to consider interest rates, repayment terms, fees and eligibility requirements. Also double-check that each company’s debt consolidation offering isn’t a debt settlement program in disguise. Debt consolidation simply combines your multiple debts into one while debt settlement involves negotiating a lower amount with creditors, which can adversely impact your credit.

Successful debt settlements ideally reduce your owed amount by 30% to 50% — however, the total you save might end up lower than this. Ultimately, how much debt you can settle through a debt settlement program will depend on factors like your account status and history as well as if your creditor wants to cooperate.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

More than a decade covering the personal finance beat as a writer and editor. Her work has been featured on national publications like Yahoo Finance, MSN Money, TIME Money, and more.

Ashley Harrison is a ӣƵ Blueprint loans and mortgages deputy editor who has worked in the online finance space since 2017. She’s passionate about creating helpful content that makes complicated financial topics easy to understand. She has previously worked at Forbes Advisor, Credible, LendingTree and Student Loan Hero. Her work has appeared on Fox Business and Yahoo. Ashley is also an artist and massive horror fan who had her short story “The Box” produced by the award-winning NoSleep Podcast. In her free time, she likes to draw, play video games, and hang out with her black cats, Salem and Binx.