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

Learn how consolidation reduces creditors, and settlement reduces debt

Debt consolidation and debt settlement are both financial strategies for improving personal debt load, but they quite different in how they resolve different issues.

Essentially, debt settlement reduces the total amount of debt owed, while debt consolidation reduces the total number of creditors you owe. Learn about the pros and cons of each strategy.

Key Takeaways

  • Debt consolidation and debt settlement help you reduce your debt load, but in different ways.
  • Debt settlement reduces your total debt owed, while debt consolidation reduces 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.

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 loan, resulting in one monthly payment at one interest rate.

Consolidation loans are offered through 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 relieve the stress of having to juggle multiple debt payments each month. 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 depend 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 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?

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 you owe. 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, although it will also have a damaging affect on your credit history.

Keep in mind that creditors are under no obligation to enter negotiations or accept your offer. Also, 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. 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.


Create a paper trail of all communications and payments regarding debt settlements in case a creditor tries to 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 your financial situation.

For example, if you simply need a way to make your monthly payments more manageable, 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.

What Type of Loan Is a Debt Consolidation?

A debt consolidation loan is generally an installment loan with a fixed term and fixed payments that you use to pay off other loans. You can also use other types of loans, like a home equity line of credit, which is a revolving loan, to consolidate debt.

How Do I Know a Debt Consolidation Company is Reputable?

When you use a debt consolidation company, look for signs of scams as this industry attracts fraudsters. Signs of a scam may include lack of communication, high fees that are requested before service, and calls for you to stop paying creditors. If you feel like a debt consolidation company is being pushy, consider it a red flag for a possible scam.

Who Qualifies for Debt Settlement?

To qualify for debt settlement, you will need to prove you are struggling financially, typically by being more than 90 days past due on your accounts. When you are delinquent, creditors may be willing to work with you toward a resolution to try to recoup at least some of the funds that you owe them.

The Bottom Line

Debt settlement and debt consolidation are both useful strategies for addressing financial struggles to help you stay in good financial health. Which method is right for you will depend on your personal circumstances, including whether you can afford to make payments with a consolidation. A bankruptcy may be considered as a last resort to manage a debt problem. Consider consulting with a professional financial advisor who can review the best options for your situation.

Article Sources
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