Debt Consolidation Vs Debt Settlement

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Managing overwhelming debt can feel like navigating a stormy sea. Two lifelines often considered by those seeking calm waters are debt consolidation and debt settlement.

While both strategies aim to ease the burden of debt, they differ significantly in approach, impact on your financial health, and long-term consequences. In this post, we'll dive into the nuances of debt consolidation versus debt settlement, helping you understand which option might be the beacon of hope you need.

Whether you're trying to lower your interest rates or reduce the total debt owed, understanding these paths is crucial in making an informed decision towards financial stability.

Ready for immediate debt help? Speak to a debt specialist today!

What is Debt Consolidation?

Debt consolidation takes all your debts and rolls them into one. You then take out a loan and pay off the debts. You then pay off that loan through monthly payments. To get a loan, you’ll probably have to have some sort of collateral. The goal is to get a reduced interest rate and lower monthly payments.

Since most debt consolidation plans involve loans, you may have additional fees like origination fees or closing costs. Those fees can add quite a bit to your existing debt.

Contact Pacific Debt today for your FREE consultation and Savings Estimate

Debt Consolidation Pros

• Reduce the number of bills
• Lessens chances of falling behind on bills
• May be able to get lower monthly payments and interest rates

Debt Consolidation Cons

• No control of spending habits – if you don’t reduce spending you will never eliminate debt
• Debt is not forgiven or even reduced
• Can take 3–5 years in a debt consolidation program to eliminate debt

Types of Debt Consolidation

There are several types of debt consolidation. These include a debt management plan (DMP), balance transfer on credit cards, personal loans, or home equity line of credit (HELOC).

A debt management program includes credit counseling and education programs. They can take a long time – up to 5 years – to complete. You will learn the roots of your financial problems and how to manage them.

Balance transfers on credit cards allow you to transfer your existing balances to a lower-interest card. This sounds great except that 0% balance cards are hard to get. If your credit score isn’t over 700, you may not be approved. In addition, balance transfers may come with a transfer fee of 2-3% on the balance and an expiration date of 12 to 18 months on the lower rate. Interest rates can then increase to more than your initial card.

Personal loans can be hard to get if you have a high debt-to-income ratio. You may end up with an origination fee, a prepayment penalty, and may need to have collateral (your car, home, etc.).

HELOCs have low interest rates but your home is the collateral. If you don’t make the payments, you could lose your house. Since it is a loan, you may have to pay application fees and closing costs as well.

Does Debt Consolidation Hurt Your Credit?

Debt consolidation can hurt your credit score. Taking out a loan requires a “hard pull” on your credit report. This may lower your credit score for a bit. It may lower your credit utilization ratio if you open a new credit card and transfer all your balances to it.

What Is Debt Settlement?

In debt settlement, you negotiate with your creditor to lower the amount you owe. Companies like Pacific Debt Relief that specialize in negotiating with creditors and have an excellent track record in debt negotiation services. One thing to consider with debt settlement, you may need to stop paying your bills to make creditors more willing to negotiate. This action can come with late fees and creditor phone calls.

Debt Settlement Pros

• May be able to pay less than you owe
• Last resort before bankruptcy
• One low monthly program payout
• Faster than Debt Management
• No credit requirements or collateral

Debt Settlement Cons

• Annoying phone calls from creditors
• Short-term impact on credit score and credit report for up to 7 years
• Possible tax consequences
• Risk of creditor lawsuit

Does Debt Settlement Hurt Your Credit?

Unfortunately, debt settlement may come with some credit score and credit report damage. Your late payment history may stay on your credit report for up to seven years. You should consider debt settlement for debts that are very delinquent or already in collections or if you are struggling to even pay the minimum. That way the damage is already done to your credit score.

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

The quick answer is that in debt consolidation, you take out a loan to pay off all other bills, and then pay off the loan. In debt settlement, you negotiate with creditors to lower what you owe. When comparing debt consolidation vs debt settlement, take into consideration the effects on your credit score, the fees charged in each case, how long the program will last, and how delinquent your debt.

Bankruptcy

Bankruptcy is a legal action to have your debt erased. Bankruptcy is considered a last resort option. It may stay on your credit report for up to ten years. It is also legally complex and expensive. In debt consolidation vs bankruptcy vs debt settlement, always try debt consolidation or debt settlement first. If you are contemplating this option, speak to a legal bankruptcy specialist for more information.

Comparing Debt Relief Options

Debt consolidation, debt settlement, and bankruptcy all provide debt relief but have key differences. See this comparison of the pros, cons, and key factors of each option to understand which may be best for your unique situation.