Competition between debt consolidation companies and debt settlement companies has always been close. While many people consolidate debts, most consumers prefer a debt settlement to solve their debt problems. What is the difference between these two debt solutions?

What are debt consolidation programs?

A debt consolidation program is where the borrower obtains a loan to be used as one-time payment to all his existing unsecured debts from different creditors. Afterwards clearing all debts, the borrower is subjected to a repayment with the debt consolidation agency. Thus, instead of submitting payments to different creditors each month, all debts are merged into a single account. The interest rate is also reduced because debts have been combined into one.

What about debt settlement?

With a debt settlement, a credit counseling agency negotiates with lenders on behalf of the borrower. The original amount of debts can be slashed off by 40% to as much as 60%, depending on the agreement reached. However, once a negotiation has been settled, the borrower is expected to be able to submit his payment right away. Since debt has been greatly reduced, payments can’t be made in installments. It should be given as a lump sum payment to the lender.

Which one is for you?

The advantage of debt settlement is that the borrower can be set free from debts at the soonest possible time while a debt consolidation loan often lasts for years. The risk of getting a loan consolidation is the possibility for the borrower to incur new debts while still in the middle of repayment to his debt consolidation lender. As a result, repayment becomes more difficult and impossible to manage.

Choosing between debt settlement and debt consolidation depends on your situation. Whichever you decide, it’s important to stick with your repayment plan and submit your payments on time throughout your loan’s term.

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