If you’re juggling multiple debts, you might be weighing the prospects of debt consolidation vs. debt settlement.
But how can you determine which option is better for you?
Millions of folks are considering this same question. As of Q1 in 2024, total American household debt rose by $184 billion to reach $17.69 trillion. You’re not alone in this debt conundrum.
To make an informed decision that’s best for you, you must understand the differences between debt consolidation and debt settlement. Both have the potential to resolve your debt ultimately, but neither is a ‘one-size-fits-all’ solution.
This article will explain debt consolidation and debt settlement, highlight their differences, and help you determine which option is better for your situation.
Additionally, we’ll explore how using home equity for debt consolidation can provide a streamlined and effective solution.
Start your application with MIDFLORIDA Credit Union.
The basics of debt consolidation
A debt consolidation strategy involves combining multiple debts into a single loan or payment—so you only have to make one monthly payment instead of several.
There are different methods of debt consolidation:
- Personal loans: typically feature a fixed interest rate and a set repayment term, making it easier to manage your payments.
- Balance transfer credit cards: Moving balances from high-interest cards to ones with a lower interest rate reduces your overall interest costs if you pay off the balance within the promotional period.
- Home equity loans: involve using the home equity you've invested to pay off your debts. Due to the property collateral, these loans frequently provide better interest rates than other loans.
- Debt management plans: Working with one of the credit counseling agencies, you can set up a debt management plan (DMP) to consolidate your debts—the agency you choose will negotiate with creditors for a lower interest rate and can create a repayment plan.
The basics of debt settlement
Debt settlement—also known as debt negotiation—involves negotiating the total amount of debt you owe, hopefully reducing it.1
This process is typically handled by a debt settlement company that works on your behalf.
Here’s how it works:
- Assessment: The debt settlement company evaluates your financial situation and determines which debts to settle.
- Negotiation: The company negotiates with your creditors to accept a lower total payment amount than what you originally owed.
- Payment: Once an agreement is reached, you make a lump-sum payment or, more commonly, a series of payments to settle the debt.
Debt settlement or debt consolidation—The differences
Understanding the key differences between debt consolidation vs. debt settlement can help you choose the best option for your financial situation:
Impact on credit score
- Debt consolidation: Since it involves paying off your debts in full and simplifying your payment schedule, it typically has a positive or neutral effect on your credit score.
- Debt settlement: Alternatively, this will negatively impact your credit score, as it involves settling debts for less than the full amount owed. Late payments during the negotiation process can also harm your credit.
Monthly payments
- Debt consolidation: Simplifies your finances by combining multiple payments into one. This can make it easier to manage your budget and ensure timely payments.
- Debt settlement: You may lower your monthly payments temporarily while negotiations are ongoing. However, you might need to make a lump-sum payment to settle the debt.
Total cost
- Debt consolidation: can reduce overall interest costs if you secure a lower interest rate. However, you will still repay the full amount of your debt.
- Debt settlement: might significantly reduce the total amount of debt owed, but you may need to pay fees to the debt settlement company, and the forgiven amount could have tax implications.
Process duration
- Debt consolidation: Provides a clear repayment schedule and term, usually ranging from a few years to several years, depending on the loan type.
- Debt settlement: The process can take several months to years, depending on the negotiations and the number of settled debts.
Which option is better for you?
Choosing between debt consolidation vs. debt settlement depends on your financial situation, goals, and preferences.
Here are some considerations to help you decide.
Consider choosing debt consolidation if you:
- Bring in a stable income and can afford to make regular monthly payments
- Prefer to repay your debts in full and improve your credit score
- Want a predictable repayment schedule with fixed terms
- Qualify for a low-interest rate loan, such as a home equity loan, to reduce your overall interest costs
Consider choosing debt settlement if you:
- Are unable to make your current debt payments and are considering bankruptcy
- Want to reduce the total amount of debt you owe
- Are willing to accept a negative impact on your credit score in exchange for debt relief
- Can arrange a lump-sum payment or agree to a settlement plan with your creditors
Using home equity for debt consolidation
One effective method of debt consolidation is using a home equity loan. Here’s how it can help.
Lower interest rates
Home equity loans usually have better (lower) interest rates than credit cards and personal loans.
This can decrease your total interest expenses and allow you to repay your debt more quickly.
Simplified payments
Consolidating your debts into a single loan streamlines your finances, resulting in one monthly payment. This simplifies budgeting and helps prevent missed payments.
Fixed repayment terms
Home equity loans are frequently paired with fixed repayment terms, offering consistency and aiding financial planning. You’ll have a clear timeline for when your debt will be fully paid off.
Start your application with MIDFLORIDA
Managing debt can be challenging, but choosing the right solution can make a significant difference.
Using a home equity solution for debt consolidation offers a streamlined and cost-effective way to manage your debts and achieve financial stability.
Whether you choose debt consolidation or settlement, the right understanding can clarify your path.
MIDFLORIDA provides personalized home equity solutions to help you consolidate your debts effectively.
Start your application with MIDFLORIDA today and take the first step towards a debt-free futureBe sure that you keep an eye out for debt settlement scams.
This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.
MIDFLORIDA Credit Union does not discriminate based on race, color, national origin, religion, sex, marital status, age, the fact that all or part of the applicant's income is derived from any public assistance program, the fact that an applicant has exercised rights, familial status, and disability.” The current statement should be: “MIDFLORIDA Credit Union does not discriminate against credit applicants on the basis of race, color, religion, national origin, sex, marital or familial status, age (provided the applicant has the capacity to enter into a binding contract), disability, sexual orientation or gender identity; because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. It is MIDFLORIDA’s policy to observe both the letter and the spirit of the law.
