Debt Consolidation vs. Debt Settlement: What's The Difference?

Camino Financial08 Jan 2024
Debt Consolidation vs. Debt Settlement: What's The Difference?
With debt settlement and debt consolidation, you can attempt to address past-due accounts. One option might be better than the other for various reasons, such as credit scores and amount of debt. We'll discuss these terms, the differences between the two, and evaluate how one might work better in certain situations.

Differences Between Debt Settlement And Debt Consolidation

Debt Settlement Is Like An Endgame For A Debt, While Consolidation Is Like A New Gameplan

Debt settlement is when you work with your creditor and come up with an amount you can pay to settle your debt. It's generally lower than the full amount that you owe. Debt consolidation is a way to pay off multiple old debts with a new loan or line of credit. It is generally paid in one lump sum rather than in continuous payments. Debt settlement often means the end of the debt, while with consolidation, you're taking on a new loan or credit card that you'll now need to keep up with.

Debt Settlement Is An Option For A Single Debt, While Debt Consolidation Is Only An Option For Multiple Debts

This is because debt consolidation, by definition, implies that you are consolidating multiple debts into one. You use either a new loan or a new credit card to pay off or transfer multiple original debts into one to better manage your debt. You can think of it like trading multiple old debts for a single new one–one which hopefully has more favorable conditions, such as a better interest rate. While with a debt settlement, you reach an agreement with your creditor or lender to pay an amount lower than the original total due. You can think of debt settlement as an approach to a single debt but consolidation as an approach to multiple debts.

Debt Settlement vs. Debt Consolidation: Which Is Better

It depends. Neither one is necessarily a better option than the other. Instead, it's a matter of which one–if either of them–is the right option in your specific situation. If you owe multiple debts but can secure a new loan with a much better rate and term, debt consolidation might be the better option in that specific situation. However, if you can't secure a better loan, you're unable to make future payments, and your creditor is threatening to sue, but you could afford to make a lump sum payment now and settle your debt, that might be an option in that situation. It all depends on your specific situation. If you need debt consolidation, at Camino Financial, we offer business loans that you can use to consolidate debt. Apply now!

Debt Consolidation: Everything You Need To Know


Debt consolidation is the process of taking multiple old debts and paying them off with a single new loan or credit card. For many people, debt consolidation is a way of simplifying their debt so that it can be more manageable or so that they can secure better conditions, like lower interest or a more extended repayment period. There are many reasons people might consolidate their debt, like to:
  • keep better track of payments they must make each month
  • lower their monthly payments
  • reduce the total amount of interest they must pay

How Debt Consolidation Works?

Debt consolidation seeks to replace multiple old debts with a single new financial responsibility. You can consolidate debt by taking out a consolidation loan or a new credit card and paying off old debts.

An Example Of Debt Consolidation

Suppose you owe $40,000, and your average APR is 25%.
  • $10,000 of this debt is credit card debt from a card with an APR of 24%
  • 10,000 is from a credit card with an APR of 26%
  • $20,000 of it is from a credit card with an APR of 25%
To pay this off over three years, you'd need to make monthly payments of around $1,600–made up of 4 different payment amounts, and you'd pay a total of about $17,250 in interest alone. If you can secure a new line of credit and transfer all three original debts to it and obtain better interest rates, you could consolidate your debts into one new card. Let's suppose you're able to get a new credit card and transfer your balance from all three old cards to it, and that your new APR is around 15% Now, to pay off the total in three years, you'd need to make monthly payments closer to $1,400, you'd only be making one payment per month, and you'd pay only a total of around $9,920 in interest.

Pros And Cons Of Debt Consolidation


  • Consolidation can simplify debt. By consolidating multiple debts, you can replace multiple monthly payments, each with its own interest rates and conditions, with a single payment.
  • Consolidation gives a chance to secure better terms. Consolidation can sometimes result in lower interest rates, a better repayment period, or other benefits–though none of that is a guarantee.
  • Provide financial control. It can provide individuals with a way to better manage their finances.


  • Consolidation doesn't guarantee better conditions. It is possible to consolidate old debts and end up with new monthly payments that total higher than old ones. It's important to clearly understand how much consolidating will save or cost you both short term and in the long run.
  • Consolidation doesn't rid you of financial obligations. While consolidating debt can be an effective way to make the debt more manageable, it is not the end of debt. You'll still be taking on a financial obligation and potentially new debt.

When To Choose Debt Consolidation

You'll need to take a thorough look at your finances and get a clear picture of your financial situation:
  • how much you owe
  • how long you have to pay it off
  • how much you earn in relation to how much you owe
  • what your credit report looks like
Consolidation is ideal when it can deliver more favorable conditions than your current debt. This might mean it's potentially a good idea to consolidate if you can secure a loan with lower interest and a better repayment period than your existing debt. However, it might not be a good option if you cannot secure a loan with better conditions.

How Do I Consolidate My Debt?

First, assess the amount you are currently paying out each month. Consider all the interest rates and fees associated with the loans and credit lines. Next, look into the different debt consolidation options available to you. It is important to compare all of your options before deciding which one is best for you. Then, apply. Depending on the lender, once you're approved:
  • You will receive the money, and you'll have to pay your previous creditors
  • The new lender will pay your old creditors directly
Finally, remember to stay on top of your payments after consolidation.
#CaminoTip While unsecured personal loans are one option, individuals with debt can also use existing assets as collateral for a secured loan which might enable them to secure more favorable terms and rates.

Types of Debt Consolidation

Unsecured Loans

People can opt to get an unsecured loan and use it to pay off multiple old debts and accept the interest, repayment period, and monthly payments of the new loan in their place. This might be a personal loan, for example. Unsecured loans can be more difficult to secure with competitive conditions like low-interest rates. Since that's a common goal of consolidating debt, some people might opt for a different approach.

Secured Loans

With a secured loan, you're backing up the loan with some type of asset. That way, lenders will be less concerned with the possibility of default, enabling them to potentially offer you better loan conditions. The big downside is that you can lose that home equity if you can't pay. One example of a secured loan is a home equity loan. If you have equity in a home, it may be possible to put that equity up as collateral.

Credit Card

Some cards–balance transfer credit cards–are designed to transfer balances, and they might even offer special introductory benefits, like a period during which they have low or no APR. But it's important to know when such a period would end when interest rates are subject to change and any other conditions associated with a potential new credit card. Credit consolidation debt relief has some major pitfalls. Credit cards can have very complex conditions and variable interest rates, which can be subject to change over time.

Debt Settlement: Everything You Need To Know


Debt settlement is the process of settling–or ending–a debt, usually with a lump sum single payment and usually through negotiation with your creditor. Through debt settlement, you may reach an agreement with your lender to pay a sum lower than the total original amount due. There are a couple of ways to settle debts. However, there are some serious drawbacks to this process. For one, the creditor will often require you to pay it all at once. This may be a steep challenge if you're having trouble making monthly payments on a debt.

How Debt Settlement Works

Debt settlement requires that you work with a creditor, either directly or indirectly. You negotiate with them and offer an amount you can afford, usually in a lump sum. In exchange for the lump sum, the lender will consider your debt settled, as though you paid it off in full. There are a few reasons creditors might agree to settle:
  • it might be easier than keeping track of debt and collecting payments
  • they might see the advantage of receiving more money at once
  • they may feel that you're more likely to pay a settlement amount than pay your original debt in full
There are a few reasons those in debt might choose to settle. For example, they:
  • are unable to pay the full amount
  • wish to end their financial obligation as soon as possible
  • are worried that if they don't settle and can't afford to pay, the lender will eventually sue them

An Example Of Debt Settlement

Suppose you owe a collections agency $10,000, and you're worried that they might sue you for non-payment eventually if you miss enough payments. You have around $8,000 set aside just for this debt, but you worry that you won't be able to make up the difference of $2,000 fast enough. You could contact the collection agency and offer them a lump sum of $7,000 to settle the debt once and for all. Then, they might accept the offer for $7,000 or tell you that they can't accept that, in which case you could make a second offer for $8,000. Should they accept this and settle your debt, you no longer need to worry about that particular financial obligation. Your credit history may, however, receive a negative mark. Regardless, this could be an ideal option if the alternative was eventually defaulting and getting sued.
#DidYouKnow The amount of forgiven debt can be taxable income.

Debt Settlement Pros And Cons


  • You settled your debt. You no longer need to make monthly payments or perry about defaulting on that particular debt.
  • Settlement can save you money. By settling for a lower amount than your total due, you won't have to spend the complete amount.
  • Offers a substantially reduced amount for the total payment. This allows you to pay off balances more quickly and potentially in one lump sum. This means that instead of making multiple payments over a longer period, you can settle your debts sooner and save money on interest payments in the process.


  • Debt settlements can negatively impact your credit score. This makes it more challenging to secure loans in the future. If you don't want a debt settlement affecting your credit score, consider other options first.
  • You may need a lot of money all at once. You may be unable to make a lump sum payment if you're struggling to make monthly payments already.

When To Choose Debt Settlement

One of the leading indicators that debt settlement may be right for you is if your total debts exceed 50% of your take-home pay each month, and you cannot make payments on these debts. This indicates that you have more debt than you can handle and should consider options like debt settlement or bankruptcy. Consider our previous example: the person has enough set aside to make that settlement payment but not enough to cover every future payment–putting them at risk of defaulting and potentially being liable for a lawsuit. However, settled debts can significantly impact your credit, so it's crucial to weigh your options carefully. Negotiating a debt settlement can also be a lengthy, time-consuming process, during which collectors may still contact you. It's often considered a last-resort option.

How To Negotiate A Debt Settlement

There are a couple of ways you can settle your debt:
  • negotiating directly with your creditors
  • working with a debt settlement company to negotiate on your behalf
Debt settlement companies might tout experience and resources but also charge you fees. If you owe money to a collections agency, they may have a system already designed to settle debts. Debt settlement programs can streamline the process.
#CaminoTip A debt settlement company allows you to negotiate lower payments and waive many fees associated with the original loan or credit card agreement.

How To Negotiate A Debt Settlement On Your Own

  1. Analyze your finances. Make sure to keep accurate records of all your income and expenses, as well as any payments you make towards the debt.
  2. Try to negotiate with your creditor. Call and explain your situation, and tell them how much you can pay monthly. You can also ask for a reduction in the total amount you owe or an extension of the payment plan.
  3. Consider other options. If you can't reach an agreement with the creditor, additional options are available. You may be able to negotiate a lump sum payment, have the debt forgiven, or consolidate your debts into one loan.
  4. Stay organized. Once you've negotiated with your creditor, keep track of all paperwork and payments made.
#DidYouKnow A good credit score allows you to do a debt transfer to a balance transfer credit card.

Types Of Debt Settlement

Lump Sum Settlement

This involves making a single, large payment to the creditor in exchange for a reduced loan or credit card balance. This option is often best suited for those who have a large amount of cash available to make the payment.

Structured Plans

Structured payment plans allow borrowers to pay down their debts over time with fixed monthly payments, including principal plus interest charges and fees associated with the settlement process.

Debt Management

This involves working with a credit counseling agency to create a plan for managing debt payments and possibly negotiating reduced payments or interest rates on existing debts. Under a Debt Management Plan (DMP), creditors agree to reduce the payments due from borrowers' accounts—in some cases by up to 50%—and allow them more time to repay their debts without any additional late fees or finance charges.

Alternatives To Debt Consolidation And Debt Settlement


If you can make budgetary changes to save more of your earnings, this might be your best option, allowing you to have enough capital to cover your debts.


Bankruptcy is often considered a sort of last resort, but there are some situations where filing for bankruptcy can be the fastest way to repair your credit.

Credit Counseling

Sometimes, you just need a little bit of help from an expert. Through debt counseling or credit counseling, you may be able to make adjustments and lower your debt over time. You also may be able to find a debt management program.  


Are debt settlement and debt consolidation the same thing?

No, consolidation and debt settlement are not the same things. Consolidating debt is a strategy that combines multiple debts into one single loan with a lower interest rate. This allows borrowers to make one payment per month rather than multiple payments across different accounts, simplifying managing finances. On the other hand, debt settlement is an agreement between a borrower and creditor to accept less than the original amount to avoid bankruptcy or collection proceedings.

What is debt relief consolidation?

Debt relief consolidation is a financial solution that helps people struggling with debt. It involves combining multiple debts into one single loan, often at a lower interest rate, so the borrower can make one monthly payment to manage their debt instead of multiple payments.

Does debt settlement affect credit score?

Debt settlement can improve and affect a credit score in certain circumstances. Debt settlement is an agreement between a creditor and a debtor to settle the debt for less than the total amount owed. When this process is successful, the lender settles the debt for a lesser amount than was initially owed and forgives the remaining balance.

Should I consolidate my debt?

If you're overwhelmed by your debt and struggling to make timely payments, consolidating your debt may be a good option. Debt consolidation is the process of combining several unsecured debts into one easy-to-manage monthly payment.

Does debt settlement work?

Debt settlement is a process that can help consumers take control of their debt and get back on track financially. The goal is to negotiate with creditors to reduce the debt owed in exchange for a single payment, or series of payments, made directly by the consumer.

What are debt consolidation loans?

A debt consolidation loan allows borrowers to combine their existing debt into one single loan. This can help simplify repayment, potentially lower interest rates and make it easier for them to manage their monthly payments. The borrower uses the loan to pay off all or most of their existing debts, resulting in a single payment instead of multiple payments to different creditors.

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