Debt Consolidation vs. Debt Settlement: Which Is Right for You?


If you’ve taken a loan and have a personal debt load, you might be wondering which financial strategy is best suited to pay it off comfortably. In my opinion, debt consolidation and settlement are both viable plans that you can employ. Both can help you lessen your load in due time. However, it is important to know how each type functions to truly grasp which strategy you should adopt. 

With this post, I will try to unravel the difference between debt consolidation loans and debt settlements so that you can make an informed financial decision. 

What is debt consolidation?

Suppose you currently have multiple debts that you need to pay off. A consolidation process combines all these debts into a single loan, which you can pay off monthly. By rolling several debts into one, you only need to heed one interest rate. These types of loans are offered by credit unions, banks, online lenders, etc. Once consolidated, you only have to pay your debt to the new lender.

What are the advantages of a consolidated debt?

In my experience, several factors make this type of loan more manageable. For instance:

  1. It eliminates the need to look after different debts and loans individually. You can simply pay them all off through a single interest rate.
  2. It can help lower the total monthly payment you need to make and the total interest rates payable.

Things to keep in mind for a consolidation loan

While a debt consolidation loan format rolls debts into a single loan with one interest rate, it does not necessarily mean you will save money. It ultimately depends on the period for which the loan is issued and the following fees. There might be additional organizational fees that you must pay, which you should always clarify with your bank, credit union, or lender. 

What is debt settlement?

This strategy involves asking your creditors to accept an amount that is less than what you owe. Essentially, in this strategy, you’re asking for a discounted payoff. If your creditor agrees, you can negotiate a mutually satisfactory amount you can pay off through monthly installments or a lump sum.

What are the advantages of a debt settlement strategy?

  1. This method can be useful to eliminate debts without having to pay the full balance amount.
  2. This is especially useful when you’re dealing with adverse situations such as bankruptcy or a similar adverse 

Things to keep in mind for debt settlement

  1. It is important to consider that creditors are not obligated to heed your negotiation, and you might have to pay the full amount if they disagree. 
  2. While effectively putting you at risk of a prolonged debut, this strategy can adversely impact your credit history.
  3. You need to have cash in hand to carry through with a debt settlement strategy.

Which strategy for eliminating debt should you adopt?

Whether you should go forward with consolidation or settlement depends largely on your financial situation. Each strategy works on a different priority basis. For instance, if your priority is to make different loans and debuts more manageable, you might opt for a debt consolidation loan. However, you’re only eligible for this with a good credit score.

Alternatively, you might want to negotiate a settlement if you’re facing an adverse financial crisis such as bankruptcy. However, keep in mind that this might adversely impact your credit score.


I have tried to explore the pros and cons of debt consolidation and settlement as two strategies for eliminating your loans. Both are useful in varying financial circumstances and can keep you in good financial health if implemented in an informed and timely way. Hopefully, my insights will come in handy when you encounter future loans.