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The Difference Between Debt Consolidation and Debt Settlement

Posted By:  |  May 21, 2015  |  2 Comment(s)

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Debt is a topic not normally discussed casually. It’s an issue people don’t bring up willingly or with ease. It can cause embarrassment and denial even among closest friends and family. While debt can cause serious grief for individuals and families, perhaps the biggest headache can come from not knowing what kind of debt relief you need.

Debt relief falls into two types of categories: debt settlement and debt consolidation. While it may seem like there is little difference between the two, consolidation and settlement are two completely different approaches to debt relief. Each solution is catered to what kind of situation you are in and the kind of help you prefer.

Debt Settlement

Debt Settlement companies take your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full. For example, if you have $25,000 in debt, but can’t afford to pay off the whole amount, settlement might be a good option for you to consider. A debt settlement company will negotiate with your creditors on your behalf. You will create a separate “escrow” account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.

Settlement companies receive fee based on a percentage of your total starting debt or a percentage of the debt they save you. The amount varies depending on the company you choose to work with, but they only get paid until they settle on your behalf. Do not work with companies that charge any type of fees up-front or claim they guarantee to make your debt go away.

Debt settlement is a good option if your debt seems overwhelming. Debt settlement companies work to lower your total debt and save you money in the process. Top settlement companies include:

Debt Consolidation

Unlike debt settlement companies, debt consolidation companies aren’t trying to settle your debt for less than you owe. Instead they combine all your debts and creditors into one monthly payment. Consolidating your debts allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors. You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.

Many people also look to consolidate their debt to lower their interest rate. Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.

Many debt consolidation companies will also offer debt counseling services to help clients determine their financial needs. These counseling services provide clients financial advice with regards to their situation and can help them determine the right path for their needs.

Top rated consolidation companies include:

Start Getting Out of Debt Now

Seeking for help with regards to debt is the first step towards living a debt-free life. While settlement and consolidation are both options, it’s important to understand the difference between the two to help find a solution that is right for you. Debt settlement companies will work with your creditors to negotiate a lower debt amount. Settlement companies can lower your debt, but you still owe your original creditors. On the other hand, debt consolidation companies will combine your debts into one payment, instead of multiple payments to different creditors. In many cases, going with a debt consolidation company will lower your interest rates as well.

Whatever debt relief route you decide is best for your situation; know that you are one step closer to living debt free.

Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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