Debt Relief vs. Debt Consolidation: Pros and Cons

Are you having trouble keeping up with your debts? With millions of Americans in the same boat, you’re far from alone.

You can break free from debt struggles. Debt settlement and debt consolidation are two options to help you take control of your debt.

What's the difference between them? Here's a summary:

This article explores the differences between the two, and offers debt relief vs. debt consolidation pros and cons. The right choice for you depends on your financial resources and your credit score. Both methods may impact your credit score. Where that score stands now may affect what choices are available to you.

In each case, the goal is to work through your current debt problems to get on a steadier financial course. Making the right choices about your debt is not only good for your finances—it can also do wonders for your peace of mind.

Debt Consolidation vs. Debt Settlement in a Nutshell

Debt consolidation and debt settlement are different types of debt management. Debt settlement involves negotiating with creditors to reduce your debt. Debt consolidation rearranges the debt without changing how much you owe. 

The right route depends on your situation, including your:

• loan balance

• credit score

• status of repayments

• ability to keep on top of your payments. 

If you're trying to get on top of your debts, learning about your options is the right place to start.  

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How Debt Affects Your Financial Health

While debt can be a useful financial tool, too much debt can weigh on every aspect of your finances.

At a time when inflation seems to make every trip to the store more expensive, debt just magnifies the rising cost of living. After all, as of mid-2025, inflation was running at an annual pace of 2.7%. At the same time, the average rate charged on credit card interest was 22.25%. In other words: Debt can be an even more expensive problem than inflation. 

Debt can not only make things much more expensive today, it can rob wealth from you in the future. Every dollar you borrow today reduces the money you'll have available in the future. It doesn't matter if you're just trying to make ends meet, save for retirement, or meet other financial goals. Having debt makes all of it harder. 

This impact goes beyond just the dollars and cents. Too much debt can drag down your credit score. That limits the future financial opportunities available to you. 

And then there's the stress. High debt payments make it harder to afford the things you need, and it can become a strain on your mental health. The constant struggle to pay bills makes it a problem you can't ignore. That's when it's necessary to change the pattern and work toward a solution like debt consolidation or debt settlement.

What Is Debt Consolidation?

Debt consolidation means taking out a new loan and using it to pay off multiple existing debts. One benefit is that you reduce the number of payments you make each month. This could make it easier to keep track of your payments. 

Beyond that, debt consolidation has several other potential advantages. Even getting one or two of these benefits could make the strategy worthwhile. You might:

• Lower your monthly payments, relieving strain on your budget

• Lower the interest rate you're paying

• Get a firm payoff date for the debt you consolidate

• ​​Lower your credit utilization ratio to increase your credit score 

• Move variable-rate debt to a fixed interest rate

• Reduce the total amount of interest you pay (unless you take longer to pay off the loan).

So how does this work? The following are a few examples of how you might apply debt consolidation options:

Suppose you owe balances on several credit cards. Not only are you paying high interest on that debt, you're struggling to manage several payments each month. Moving those balances to a balance-transfer credit card would merge all those payments into one. Better yet, balance-transfer cards often offer 0% interest for a limited time. If you can pay the balance off within that time, you save a substantial amount of interest.

You may decide it's going to take longer to pay off your debt than the 0% interest period on a balance transfer card. If so, a personal loan is another option for debt consolidation. Personal loan interest rates are generally much lower than credit card rates. Not only that, but a loan gives you predictable monthly payments and a definite payoff date. That certainty could make it easier to plan your budget than when you have variable credit card payments.

Let's say you're a homeowner. Between paying your mortgage over time and the rise in real estate prices, you've built up a decent amount of equity in your home. But you also have a personal loan and a few credit card balances. In addition to managing multiple payments, you're paying relatively high interest rates on these other debts. You could take out a home equity loan to pay them off. That would simplify your payments, and should leave you with a lower interest rate.

The common thread in all these examples is that debt consolidation does not reduce the total amount you owe. However, it restructures your debts to make them more manageable. In some cases, that could include saving you money by reducing the amount of interest you pay over time.

Debt consolidation works best if your credit is good enough for you to qualify for a new loan. It’s less realistic if missed payments have significantly damaged your credit. 

Advantages and Disadvantages of Debt Consolidation

In some situations, debt consolidation can be a very efficient way of making debt more manageable. However, no solution is perfect for every situation. There are advantages and disadvantages to debt consolidation. Understanding them can help you determine whether it's the right fit for your situation.

Debt consolidation advantages

Here are some advantages of debt consolidation:

• It makes managing monthly payments easier by merging multiple payments into one.

• It can make monthly payments smaller by reducing your interest rate and/or spreading repayment out over a longer time.

• You can reduce the total amount of interest you pay over the repayment period. Lowering your interest rates and/or accelerating repayment can make this happen.

• Consolidating credit card debt into a loan can give you a firm timeline for repayment.

• Upfront credit impact should be minor. In the long term, there’s potential for positive impact from making payments more manageable.

Debt consolidation disadvantages

• Generally, it takes a solid credit history to get new credit. If yours has been seriously damaged, you may have trouble qualifying for a debt consolidation loan or a balance transfer credit card. 

• There may be fees associated with getting a loan or using a balance transfer card.

• Debt consolidation doesn't reduce the total amount you owe. It can make the payments more manageable, but if your debt has gotten out of hand, it may not be enough to make them affordable.

• Debt consolidation may stretch repayment over a longer time. This can increase your total cost over the repayment period.

• To be successful, debt consolidation should be part of a broader budgeting and debt reduction plan. You need to truly change your spending habits. Otherwise, after you pay off credit card balances with a consolidation loan, you might simply build those balances back up. 

Debt consolidation is generally a good fit if you've recognized the problem early. It's more likely to work if your options aren’t limited by credit problems. 

When Should You Consider Debt Consolidation?

Debt consolidation makes the most sense when:

• You can move high-interest debts, like credit cards, to a new, lower-interest loan.

• You have a plan for managing new debt.

• You can afford your debts, but want to make them more efficient.

Whenever you have debt, it’s smart to be on the lookout for ways to make it cheaper and easier to manage. Consider debt consolidation if you can get a new loan with better terms than your existing debt. You should also have a plan to avoid running debts back up. 

If your debt was caused by overspending, be proactive—shut down or freeze your credit cards. This is especially important while you’re paying down your consolidation loan. This may force you to become more disciplined about budgeting. Otherwise, you risk taking on even more debt. 

For example, let's say you've built up your credit card balances because you've had trouble making ends meet. You can qualify for a personal loan with a lower APR than your credit cards, so you can consolidate your debt. You use the loan to pay off your card balances, but you still don't have enough cash to cover your everyday expenses. There's a danger you could wind up using your cards and owing that money in addition to your debt consolidation loan.

On the other hand, if your debt was caused by a one-time event like a medical emergency, you might be at less risk of future overspending.

Running up the balances on paid-off credit cards is a common risk factor with debt consolidation. Be aware of it, and have a plan to avoid increasing your debt.

What Is Debt Settlement?

Debt settlement is also often called debt relief—although the term "debt relief" can also apply to a broader range of debt management strategies. 

Debt settlement means negotiating with creditors to reduce the amount you owe. It is designed to help when you find yourself with an overwhelming amount of debt. You can do this yourself, or hire debt settlement specialists like Freedom Debt Relief to do it for you.

A debt settlement professional charges a fee for any debt they settle. The advantage is that a professional has usually been through the process many times before. This may help them negotiate a much better settlement than you'd get on your own. That may make it more than worthwhile to pay the fee.

Whether you hire a professional or go it alone, trying to negotiate is better than just ignoring the debt. Ignoring your debts could result in bill collectors hounding you while you damage your credit score by missing payments. Meanwhile, as interest and fees accumulate, your debts grow.

The better way is to contact your creditors and try to work something out. Creditors would like you to pay the full amount you owe, but they don’t want to waste time trying to collect on debts you can’t pay. If you can demonstrate to a creditor that there’s no way you can pay your debt in full, they might agree to accept a lesser amount. As the saying goes, half a loaf is better than none.

This works best with unsecured debt. If you owe secured debt, the creditor can always claim the collateral rather than accepting less than you owe.

Debt settlement also works best if you have a specific offer. As soon as you decide to try settling your debts, build up whatever amount of savings you can. If you work with a debt settlement professional, building up that kind of settlement fund is likely to be part of the program.

This settlement fund becomes the money you could offer your creditors. That way, even though it's less than the full amount you owe, the creditor may be swayed by the idea that they can get their hands on that cash right away. 

Debt settlement does show up on your credit report and impact your credit score. When a debt is reported as “settled,” that’s less favorable than “paid as agreed." Still, by the time people decide to settle debts, they've usually already damaged their credit. At that point, settling debts can help you make a fresh start. From there, you can rebuild your credit. 

There’s another possible consequence: Forgiven debt is usually considered taxable income, and would be subject to income taxes in the year the settlement agreement is reached. However, if you qualify as insolvent (your financial liabilities are greater than your assets), you may not have to treat forgiven debt as taxable income.

The key is to get your debt down to a level where you can afford to make all your payments on time every month. At that point, you're better positioned to build up your credit score. 

People just like you are seeking debt relief across the country. The first step is the most important one—explore your options.

Pros and Cons of Debt Settlement

Is debt settlement the right solution for your needs? Let’s look at the pros and cons of debt settlement.

Debt settlement pros

• It reduces the total amount you'll have to repay.

• Reducing your total debt should also mean lower monthly payments.

• By wiping out part of your debt, debt settlement also reduces the amount of interest you'll have to pay in the future.

• You can enter a debt settlement program even if you have a low credit score.

• Debt settlement can be a less-restrictive way of settling debts than bankruptcy.

• Debt settlement gives you the option of negotiating for yourself or hiring professional help.

Debt settlement cons

• It typically only works with unsecured debts (those without any collateral).

• Your credit history might get worse before it gets better.

• You have to commit to saving to build up a debt settlement fund.

• If you work with a debt settlement professional, fees reduce your savings from settled debt.

• Forgiven amounts may be subject to taxes.

Debt settlement may be worth considering if you have a lot of unsecured debt, like credit card debt. It may be the right option if your credit score is too damaged for you to qualify for new credit. It might also help if you couldn't afford to pay your debts even with more time to pay or a lower interest rate.

When Should You Consider Debt Settlement?

Debt settlement makes the most sense when:

• You’ve already considered other solutions like tighter budgeting or debt consolidation.

• You have a financial hardship that leaves you no realistic way of fully repaying your debts.

• You’ve already fallen behind, or you’re at risk of falling behind.

Debt settlement can be a game-changer when you can’t see any realistic way of paying your debts in full. Consider debt settlement if you’re experiencing a financial hardship that could make it impossible to fully repay what you owe.

Maybe you’ve tried cutting unnecessary expenses, but still can’t make your money stretch far enough to cover your essential costs. Perhaps you’ve considered debt consolidation, but found it wouldn't lower your payments enough. Maybe you couldn't qualify for new credit to consolidate debts.

Debt settlement isn't quick or easy. You have to have something to offer your creditors. To save up money for offers, many people choose to stop paying their debts. And any time you stop paying your debts, you should expect a negative impact on your credit standing. Late and missed payments stay on your credit report for seven years. 

Even so, becoming financially stable could put you in a better position to build healthy credit and a better financial future.  

Debt Settlement vs. Debt Consolidation: A Side-By-Side Comparison

Think of debt consolidation and debt settlement as tools for different situations. Which strategy is better for you depends on your needs and circumstances. Here’s a rundown of some of the key differences between debt consolidation and debt settlement:

Which Option Saves More Money?

So what's the bottom line? Which option can save you more money on your debt? There’s no immediately clear answer until you’ve looked at the financial impact on your situation.

When you consider these options, there's more than one way to define that financial impact. It's important to recognize all three potential areas of cost and savings when making your decision.

Reducing the amount you owe

Debt consolidation does not reduce the total amount you owe. It only revises the repayment terms of that debt. Debt settlement can reduce the total amount of unsecured debt you owe.

Interest costs

Debt consolidation can reduce your interest costs by lowering the interest rate you're paying on debt. It can also save you interest by accelerating the repayment period—if you can afford the larger monthly payments that may be required.

Debt settlement addresses the principal you owe, not the interest. However, if part of your debt is forgiven, you don’t pay interest on that part going forward, lowering the total interest cost. This is especially true since debt settlement works best with unsecured debt, which usually has relatively high interest rates. 

Fees

For debt consolidation, there may be fees associated with getting a loan or using a balance transfer credit card. However, these fees are typically a small percentage of the amount involved.

Debt settlement should only cost you a fee once part of your debt has been cancelled. Then that fee is based on the amount of debt cancelled, and it may represent a significant portion (e.g., 15% to 25%) of that amount. 

Alternatives to Debt Consolidation and Debt Settlement

Debt consolidation and debt settlement aren’t the right debt solutions in every situation. Here are some other ways to manage overwhelming debt:

• Debt management plan (DMP): You work with a credit counselor to create a plan to pay down your debts. Your counselor then negotiates with creditors on your behalf. The goal is to make your payments manageable. Once the DMP is set up, you make a single monthly payment to the credit counselor, who will split it between your creditors. This may work if you think you can pay your debts, but just need some help organizing payments and negotiating better payment terms.

• Credit counseling: Credit counselors can help you lower your payments and organize your budget. You don’t have to set up a debt management plan to work with a credit counselor. A good first step if you feel overwhelmed by debt is to have a credit counselor explain your options.

• Negotiate your own payment plans: You may be able to get yourself some breathing room by speaking directly to creditors. Some creditors may lower your monthly payment or give you a reduced interest rate. This is especially true if you face a temporary hardship like a job loss. It's always better to talk than to miss payments.

• Bankruptcy: Bankruptcy is a legal process that takes place in court. You may be able to reorganize your debts, or even completely walk away from some of your debts. The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. This may be the right move if you've tried other methods, but just don't see a way to make all your payments.

• Pay off the debt: You could follow a plan to pay off your debts without a program. Debt payoff plans usually require that you make some sacrifices and cut back on spending. But people do it successfully all the time.

• The snowball method: This is one way of organizing your payments. It involves putting any extra payments toward your smallest debt first. That provides motivation since you get the smallest debt paid off the fastest, getting rid of one payment. It doesn't help you pay off your overall debt faster, but some people find it a helpful way to organize payments and keep going.

• The avalanche method: This is another approach to organizing payments. It directs any extra payments towards your highest-interest debt first. By targeting that debt first, you save more on interest in the months that follow. This means more of your payments go toward paying down interest, and that allows you to pay off your overall debt faster. 

Debt Settlement vs. Debt Consolidation: Deciding What Works for You

To decide on the right way to manage your debt, take a close look at how each method will affect your situation. Think about what you’d most like to accomplish. If your debt feels unmanageable, you may have different goals than someone who simply wants to pay less credit card interest.

Consider more than just reducing your monthly payments. Factor in the total debt costs, the amount you'd pay in fees, and the impact on your credit score. That way, you can decide which strategy will leave you better off, now and in the future.