Debt Settlement vs. Debt Consolidation

Debt settlement and Debt Consolidation are both useful financial approach in improving personal debt load. One reduces creditors, and the other reduces debt.

Debt settlement is simply defined as a reached agreement between a creditor and a borrower wherein a reduced payment is regarded as payment in full. This was usually offered by third-party companies that claim to lessen your debt by negotiating a bargain with your creditor. It is known as “debt-relief” or “debt adjusting” which sounds great at first, but can be risky because it can potentially affect your credit score.

Typically, the third-party company charge a fee which is often a percentage of the amount you’d save on the settled debt.

Here’s the benefits and risks involved:


  • Can lower your debt amount
  • Helps avoid bankruptcy
  • Get creditors and collectors off your back


  • There is no guarantee that the creditors may agree to negotiate
  • If you stop making payments on your debt, it can end up to paying more interest and late charges.
  • Can negatively impact your credit score. If your debt settlement company advise you to stop making payments as they negotiate, and at the point of not having final agreement on anything, all the missed payments can lead to delinquent accounts on your credit reports.

Photo by Avery Evans on Unsplash

On the other hand, Debt Consolidation is a process that combines multiple debts into consolidation loan that has one monthly interest rate. Take time to compare the APR or Annual Percentage Rate, loan repayments terms, fees, and the credit score requirements to get the best option. The following are its benefits and risks:


  • If it reduces the credit utilization ratio, it may help improve credit scores
  • It makes monthly payments more manageable
  • Useful for reducing the total number of creditors you owe
  • It relieves the stress of having to juggle multiple debt payments 


  • A debt consolidation loan may be secured or unsecured, you can learn more here.
  • Interest rates for debt consolidation loans may vary; some creditors may also charge fees.

So, which is better and the most viable option? It all depends on your financial situation. To have a better understanding of your financial circumstances, it is best to get connected with a debt advisor to easily determine which one to take. Carefully study which one can cause financial damage and can help avoid bankruptcy. And, with personal responsibility and legal knowledge of Fair Debt Collection Practices Act, you can be very specific about what a debt collector can and can’t do that can help you decide and act accordingly.


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