Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jun 7, 2021

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  • Debt consolidation is when multiple debts are combined into a single loan
  • Debt settlement is when the lender and borrower agree that the borrower will pay an amount less than what they owe
  • Debt consolidation can combine multiple bills into one monthly payment and reduce interest, but may also cost more in interest in the long run
  • Debt settlement saves money by lessening the amount owed, but the borrower must have cash on hand, and this method is typically used for delinquent accounts

Which is better: debt consolidation vs. debt settlement? These two debt-reducing methods sound similar but differ quite a lot. If you’re trying to pay off a mortgage loan, auto loan, or student loan, which should you choose? Read more below to find out.

Deciding between debt consolidation vs. debt settlement? Enter your ZIP code below to compare loan rates from lenders in your area to find an affordable debt consolidation loan that works for you.

What is debt consolidation?

Debt consolidation is when multiple debts are combined into a single loan. You may achieve this with a debt consolidation loan, balance-transfer credit card, home equity loan, or 401(k) loan. Therefore, you will pay off all of your debt with one monthly payment and one interest rate.

You may have access to secured and unsecured debt consolidation, depending on the type of financial product you choose to use. If the loan is secured, you will need to provide an asset as collateral, such as your home or car, a retirement account, or an insurance policy.

You could also seek out consolidated credit counseling or consolidated debt counseling to get help with your specific debts and financial situation.

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What is debt settlement?

Debt settlement differs from debt consolidation in that it doesn’t combine your debts. Instead, you would work with each of your creditors to decide on an amount less than what you owe that you would pay in a lump sum or installment payments.

While this can help you pay less than what you owe, lenders are not obligated to negotiate or accept a settlement offer. Often, they will wait until you are severely delinquent on your account before making a deal.

Which is better: debt consolidation vs. debt settlement?

Consumer debt grew to an all-time high of $14.88 trillion in 2020. Choosing between debt consolidation vs. debt settlement to take control of your debt is relatively easy since it mostly depends on your financial situation.

Debt consolidation has some benefits. If you are currently dealing with the stress of paying multiple creditors and keeping track of a bunch of bills, consolidating can make it easier by combining it into one payment to one lender. You may also be able to save money by paying less interest.

However, depending on your loan repayment term, the interest over time may end up being more than what you would have paid with your multiple debts.

Debt consolidation may be a good choice for you if you want to reduce stress and find a financial product that will save you money on interest.

Debt settlement can help to save money by allowing you to pay less than what you owe. You may also prevent collection actions, such as lawsuits. However, late payments will damage your credit, and the lenders may not agree to a settlement offer.

Debt settlement is generally only recommended for individuals who are severely behind on their bills or contemplating Chapter 7 bankruptcy. It is not recommended to purposely withhold payments for debt settlement purposes.

If you are still in a manageable financial situation, you may want to look into debt management vs. debt settlement. Enter your ZIP code below to find an affordable debt consolidation loan from lenders in your area.