Debt consolidation and debt settlement are both alternatives to consider when struggling with problem debt, but both of them employ entirely different approaches to break the cycle of ongoing debt challenges. The availability of both alternatives heavily hinges on your credit score and financial situation. Consulting a finance expert could help you understand which one is more suitable for you.
Each debt payment plan has its own upsides and downsides. Before knowing that, you must have clarity about these terms. This blog discusses in detail the difference between debt consolidation and debt settlement, their pros and cons and which one is better.
What is debt consolidation?
Debt consolidation is a process of combining all your existing debts into one large personal loan. When you have multiple debts, you might juggle between them. It can be challenging to adhere to the payments on each debt. You are highly likely to fall behind on payments. Late payments and missed payments will continue to accumulate your debt.
Consolidation is a process in which you combine multiple debts into one large personal loan. For instance, if you have outstanding payday loans worth €1,000, emergency loans worth €500 and bad credit loans worth €1.500, you can take out a personal loan worth €3,000 to pay off all these outstanding debts so that you are left with only one large personal loan worth €3,000, which you will be paying down in multiple instalments.
A consolidation loan will make it easier for you to settle your dues easily because you are to discharge your debt in fixed instalments over a period of time. However, it is not as easy as it seems. There are certain terms and conditions that you have to meet in order to apply for a consolidation loan.
Consolidation loans are available from banks, credit unions and online lenders. Since you can get rid of multiple debts, you can get some peace and relief. The size of monthly instalments will be lower. In addition, you will likely qualify for lower interest rates. However, if you are taking out debt consolidation loans for bad credit, you would not be able to qualify for lower interest rates.
Here are some facts about consolidation loans
- Consolidation loans can help improve your credit score if you repay all instalments on time. However, this is possible only when the repayment length of a credit rating is at least six months.
- Consolidation makes it much easier to repay your debt because you have to pay down the debt in fixed instalments over a period of time.
- Consolidation loans are generally approved when your credit score is good. If your credit rating is less than perfect, you will not be able to qualify for these loans. Make sure that you take out these loans from genuine and honest private money lenders in Ireland.
- Consolidation loans do not include secured loans such as mortgages and auto loans.
- There is no guarantee that your lender will combine all outstanding short-term loans. It is likely that, despite consolidation, you will have to settle some of your loans individually
- Because consolidation loans are not secured, there is a possibility that you will obtain high interest rates.
- Upfront cost could be high. Some lenders charge processing fees as well.
- Even if your credit rating is stellar, you might not be able to get the desired results. Despite consolidation, you might find yourself struggling with debt.
What is debt settlement?
Debt settlement is entirely a different approach from a consolidation. Debt settlement process involves negotiating with your lender to accept less than what you borrow. Here comes the role of debt management agencies. They will talk to your creditors to accept less than what you borrowed. The biggest benefit of debt settlement is that you can eliminate debts without having to pay them in full.
Debt settlement is considered to be a more attractive alternative than debt consolidation if you are bankrupt, despite the fact that it will have a damaging effect on your credit history. It is worth bearing in mind that your creditors are under no obligation to enter into a negotiation contract with you.
If a debt management company tries to contact them to negotiate for accepting less money, the ball is always in the court of the lenders. It is ultimately lenders who would decide whether or not to enter into a negotiation agreement.
A debt consolidation loan seems to be a better alternative if negotiations break down.
Here are some facts about debt settlement
- Debt settlement helps save you money because it will help you pay less than what you owed after negotiating with your lender.
- Another benefit of debt settlement is that it lets you have some wiggle room in your budget. You can easily meet other essential expenses.
- Debt settlement can prevent you from bearing consequences from debt default, such as bankruptcy or a lawsuit.
- Debt settlement is seen as your recklessness towards finances. Therefore, it lowers your credit rating. Even though you settle in full on time, it will be recorded on your credit file that you paid less than what you borrowed.
- You will have to pay additional fees and charges when it comes to debt settlement.
- There is no guarantee that your creditors will ever be willing to enter into a negotiation agreement.
Debt consolidation and debt settlement – difference
| Debt consolidation | Debt settlement | |
| How it works | Turning outstanding debts into one large personal loan | Involves negotiating with your lenders to accept less amount |
| Credit score impact | Helps improve your credit score if credit utilization ratio goes down | Despite settlement in full, your credit score will be hurt. |
| Cost | Interest rates are generally quite high despite a good credit rating | It involves certain fees and charges especially if done with the help debt management company |
| Pros | Helps make repayments easier and save money on interest | Helps eliminate the debt faster, without any obligation to pay in full |
| Cons | You may end up paying more as not all loans could be combined | Not every lender would be willing to negotiate |
Debt settlement or debt consolidation – which is better
There is no solution better than the other. If you are looking to choose between debt settlement and debt consolidation, a general rule of thumb says that you should carefully take into account all pros and cons.
You should never jump at an alternative without deliberation. A golden rule of thumb says that you should carefully consider all pros and cons. You can consult a financial advisor if you are unable to decide between the two options.
Whether you should consider consolidation and settlement also depends on your income sources and a good credit score.