Debt consolidation and debt settlement both are ways of financing and debt management. Though they both are ways to help reduce the debt load and make payoff easier. But, both functions in a different way. People may often confuse debt consolidation and debt settlement. In this article, we will know, definitional, beneficial, and functional differences between debt consolidation and debt settlement.
What are debt consolidation and debt settlement?
The act of taking a new loan, borrow, or debt to pay off the other debts and liabilities is called Debt consolidation. Here you consolidate your loans by taking a new loan, you pay off all the old loans and payables. It does not clear any of your previous debts but brings all the debts under one single lender. Like a single debt replacing old ones.
On the other hand, debt settlement is not any kind of replacement. It’s a strategy by which you negotiate with your creditor to reach on an agreement that allows you to pay less than what you actually owe. Debt settlement happens between you and one of your creditors. You have to negotiate separately with each one.
Functional difference: Debt settlement and consolidation both function in a different way.
In debt consolidation, you have to manage a third party to give you a loan/credit with which you can pay off all your previous debt. And then you pay the third party slowly. It increases your debt with its additional interest. But gives you a long time and an easier way to become debt-free. You may need to mortgage or have a good relationship and other requirements to get a debt consolidation loan. Debt consolidation cannot decrease or vanish the amount of your debt.
But in debt settlement, you won’t need any third party involvement. You have to negotiate with each of your creditors to convince them to decrease the amount. You may withhold your payment but it doesn’t increase the time limit but damages your credit score. Your creditor is not bound to accept your offer. But if you can convince him, you have a good chance to get a portion recouped and pay the rest.
Beneficial differences:
Debt consolidation gives you a long time to become debt-free. You can pay the lender monthly a shorter amount at a short interest rate while clearing all your previous debts. So, you don’t need to pay a big amount at a single time.
On the other hand, debt settlement can decrease your debt. But you have to pay for the rest soon.
So, which one is better?
Debt consolidation and debt settlement both have their own way of application. If you can manage both at the same time then it will be even better for you. If you have enough to pay your debt if a little portion of it is cleared then you should go for debt settlement. But if you have debt from several companies and if you want to bring the installments and payable under a single creditor, pay your debt slowly, get a longer time limit, and want to clear all your previous debts fats then debt consolidation is the way for you. If you can do debt settlement first with each creditor and then clear the rest with debt consolidation, then it will be even better for you. But remember neither Debt consolidation nor debt settlement is very easy to manage.