What’s the Difference Between Debt Consolidation and Debt Settlement?

One reduces creditors, and the other reduces debt

Debt consolidation and debt settlement are both financial strategies for improving personal debt load, but they function quite differently and are used to resolve different issues. At a very basic level, debt settlement is useful for reducing the total amount of debt owed, while debt consolidation is useful for reducing the total number of creditors you owe. It is possible to receive secondary benefits through either strategy, particularly debt consolidation.

Key Takeaways

  • Debt consolidation and debt settlement help you reduce your debt load, but they do so in different ways and by using different strategies.
  • Debt settlement is helpful in cutting your total debt owed, while debt consolidation is useful for cutting the total number of creditors that you owe.
  • With debt consolidation, multiple loans are all rolled into a new consolidation loan that has one monthly interest rate.
  • With debt settlement, either you or a credit counselor negotiates with your creditors so that you can pay a lower amount than what you owe, often in a lump-sum settlement.

What Is Debt Consolidation?

Debt consolidation is a process in which you combine multiple debts into a consolidation loan. This is a single loan that rolls all of your prior debts into one monthly payment at one interest rate. Consolidation loans are offered through financial institutions—including banks, credit unions, and online lenders—and all of your debt payments are made to the new lender going forward.

Consolidating debt in this way can yield psychological benefits, since it relieves the stress of having to juggle multiple debt payments each month. It’s also possible that a consolidation loan may result in a lower total monthly payment or a lower average interest rate on your debt. Whether you’re able to save money on interest over time may hinge on the length of the loan repayment term and/or whether you pay any fees for the loan, such as application or origination fees.

A debt consolidation loan may be secured or unsecured. Secured debt consolidation loans require you to use one or more assets as collateral, such as your home, car, retirement account, or insurance policy. For example, if you take out a home equity loan to consolidate debt, then your home would secure the loan.


Debt consolidation could help improve your credit score if you’re able to reduce your credit utilization ratio, but it’s important to monitor your credit reports and scores for any potentially negative impacts.

What Is Debt Settlement?

While debt consolidation allows you to combine multiple debts into a single loan, debt settlement utilizes a very different strategy, When you settle debt, you’re effectively asking one or more of your creditors to accept less than what’s owed on your account. If you and your creditor(s) reach an agreement, then you would pay the settlement amount in a lump sum or a series of installments.

The advantage of debt settlement is that you can eliminate debts without having to pay the balance in full. This may be an attractive alternative to bankruptcy if you’re considering a Chapter 7 filing as a last resort when in dire financial straits.

It’s important to remember, however, that creditors are under no obligation to enter negotiations or accept your offer. Also, you’ll need to keep in mind that offering a settlement requires you to have cash on hand to pay agreed-upon amounts. If you don’t have the cash to negotiate with, then seeking a debt consolidation loan may be the better option.


Typically, creditors will only consider debt settlement for accounts that are significantly past due. Therefore, if you’re still current on your balances, then this may not be an option.

Debt Consolidation vs. Debt Settlement: Key Differences
Debt Consolidation Debt Settlement
How it works Debts are combined into a single loan with one interest rate. Debt balances are negotiated to pay less than what’s owed.
Credit score impact May help improve credit scores if it reduces your credit utilization ratio. Late and past-due payment history for a settled account could hurt your credit score.
Cost Interest rates for debt consolidation loans vary; some lenders may also charge fees. Debt settlement may cost nothing if you do it yourself, but debt settlement companies can charge a fee for their services.
Pros Combining debts into a single payment could make repayment easier, and you may be able to save money on interest. You can eliminate debts for less than what’s owed and head off collection actions, including creditor lawsuits.
Cons Depending on the length of the loan term, you could pay more in total interest over time. Not all creditors may agree to a debt settlement, and late payment history can harm your credit rating.
Debt consolidation and debt settlement offer two different approaches to managing debt.

How to Negotiate a Debt Settlement

Debt settlement requires you to have some bargaining skills, but the process itself is not that complicated. If you’re behind on one or more debts, then you would begin by reaching out to your creditor to ask if they’re open to negotiating a settlement. You can do this over the phone, but if you prefer to have a paper trail, then you can send a written request.

At this point, the creditor can do one of three things: accept your settlement offer, reject it, or make a counteroffer. If your creditor chooses to counteroffer, then you can weigh whether the amount they’re asking for is realistic for your budget.

Once you and a creditor agree on a settlement amount, you can arrange to make the payment. Again, you may be asked to make a single lump-sum payment or several installment payments, depending on the creditor. Your method of payment may vary and includes sending an electronic payment from your bank account, wire transfer, or paper check.

After a debt is settled, it’s gone—the remaining balance is wiped clean. However, with unsecured debts such as credit cards, you risk having your account closed completely after the settlement is made because the lender will not want to continue to grant you credit. This, along with any late payment history associated with the account, could cost you credit score points.

If you aren’t comfortable with negotiating debt settlement on your own, then you can hire a debt settlement company to do so on your behalf. Be aware that this will likely involve paying a fee. You may contact the Federal Trade Commission or the National Consumer Law Center for free information on debt negotiation and debt negotiators.


Be sure to create a paper trail of all communications and payments regarding debt settlements, in case a creditor tries to come back later and claim payment for any forgiven balance.

Debt Consolidation vs. Debt Settlement: Which One Is Better?

If you’re considering the best way to manage debts, then you may be weighing debt consolidation against debt settlement. But one may be a better choice than the other, depending on the specifics of your financial situation.

For example, if you simply need a way to make your monthly payments more manageable for your budget, then consolidating debts into a single loan could make sense. Keep in mind that you’ll need good credit to qualify for the lowest rates on personal loans for debt consolidation.

If you’re already behind on payments for one or more debts and your creditors are threatening to sue, then you might consider debt settlement instead. Assuming you have cash available to make settlement payments with, this could be less financially damaging than filing for bankruptcy protection.


If you’re looking for debt consolidation loans, take time to compare the annual percentage rate (APR), fees, loan repayment terms, and minimum credit score requirements to find the best loan options.