Debt settlement and debt consolidation are two methods you can use to get out of debt. The former involves hiring a debt company to negotiate with your creditors, while the latter involves taking out a new loan to pay off your existing debt.
Debt consolidation is called a balance transfer when you have to move your existing credit card debt to a 0% card. If you are already under a pile of debt, you might have to choose between debt consolidation and debt settlement. However, making the right choice is not so easy. Consult a loan broker in Ireland if you cannot decide.
Debt settlement vs debt consolidation
The following table demonstrates debt settlement vs debt consolidation:
Aspects | Debt settlement | Debt consolidation |
Process | The debt management company will negotiate with your creditors to allow you to pay less than you owe as a final payment. | It consolidates two or more high-interest debts with a personal loan at a low interest rate. You need to apply for a balance transfer card to get out of credit card debt. |
Credit score requirement | There is no requirement to maintain a good credit score. | You must have a good credit score. Subprime borrowers might not qualify for consolidation. |
Costs | You will have to pay debt settlement fees. | Along with interest, you will pay origination fees or balance transfer fees in case of a balance transfer card, |
Financial impact | Reduces the amount of debt you have to pay in total. | It can help reduce the size of monthly payments. It might help you pay off your debt faster. |
Credit score impact | It will have a long-term impact on your credit score. | It can hurt your credit rating at the time of application, but this is a temporary impact. |
Although debt consolidation and debt settlement are both viable ways to get out of insurmountable debt, they work differently.
A debt consolidation loan is a better choice:
When you want to reduce interest rates.
If your credit score is good, you can easily qualify for a consolidation loan at a lower interest rate. Credit card debt holders can also easily apply for a 0% credit card.
To reduce the size of monthly payments. You can easily manage your debt payments.
To improve your credit score. Hard inquiries will result in a dip in your credit score, but this temporary effect will be gone if you make payments on time.
A debt settlement is a better choice:
When the debt is so large that you cannot pay it off, this will enable you to pay less than what you owe as a final settlement.
When you have already fallen behind on payments.
When you have been refused for consolidation loans and balance transfer cards.
When you want to avoid filing for bankruptcy.
Bear in mind that debt settlement can badly affect your credit score, but if you already have an abysmal credit score due to missed payments, you have no option left other than that. No lender will consider your application for consolidation if your credit report is not good at all.
What is debt consolidation?
A debt consolidation is a process of combining all your outstanding debts into one large loan. Here are some ways to consolidate your debt:
You can use a personal loan when the loan amount is not too large. You might avail yourself of lower interest rates.
A balance transfer card comes in handy when you have racked up credit card debt. This will offer you an interest-free period.
If you are a homeowner, you can use the equity you have built in your house to repay your existing debt.
Here are the debt consolidation pros and cons:
Pros | Cons |
If you qualify for a loan, you might be able to save money on interest. | You need a good credit score. A subprime credit rating cannot enable you to qualify for these loans. |
Consolidation allows you to make one single payment. You do not have to juggle multiple payments. | You will have to pay upfront fees, which could be up to 7% of the total debt amount. Maybe what you save on interest is offset by fees. |
If you are consolidating credit card debt, you do not have to pay interest provided the debt is settled within the interest-free period. | There is no guarantee that lenders will consolidate all short-term high-cost debts. |
What is debt settlement?
It is vital to understand debt settlement meaning to decide whether this is an effective option for you. Debt relief companies will negotiate with your lenders to accept less than what you owe as a final settlement.
Here are the pros and cons of debt settlement:
Pros | Cons |
It will help you save money as you will pay less than what you owe. | It will damage your credit score as it will remain on your credit file for six years. |
Your budget will have more room to enable you to keep up with payments. | You will have to pay fees for making arrangements. |
It can preclude you from getting further into debt. | There is no guarantee that you will be able to get out of debt. |
Alternative ways to get out of debt
A loan broker in Ireland, like GiveMyLoan, can help you choose the right option. However, sometimes, neither debt consolidation nor debt settlement works to your advantage. Here are the alternatives:
Consider a debt snowball or debt avalanche method.
