Debt consolidation vs. debt settlement: what's the difference?

Consolidation combines what you owe into one new loan, and you repay the full balance, usually at a single fixed monthly payment. Settlement is an attempt to resolve a debt for less than the full amount, almost always through a third-party company, and it can do real damage to your credit on the way there.

One reorganizes your debt. The other tries to shrink it, and takes on real risk to do it.

Consolidation means using one fixed-rate personal loan to pay off several balances at once, most often credit cards. Instead of multiple revolving balances with variable rates and multiple due dates, you are left with a single installment loan: one payment, one rate, and a defined payoff date.

You still repay everything you borrowed. The potential benefit is structure (a clear finish line) and possibly a lower interest rate than your cards, though your actual rate, term, and approval depend on your credit, income, and state, and are never guaranteed.

• •You repay the full balance you owe.
• •Best suited to people with steady income who can cover a fixed monthly payment.
• •Keeping accounts open and not running the cards back up is what makes the math work.

Debt settlement is a different path, usually for people who are already behind or cannot realistically repay what they owe. A debt-settlement company negotiates with creditors to accept less than the full balance. Many programs ask you to stop paying your creditors and instead deposit money into a dedicated account that is used to fund settlement offers over time.

Settlement is not a loan and does not give you funds. It can have serious consequences, and it is important to understand them before considering it:

• •It can significantly lower your credit score, especially if you stop making payments.
• •Providers typically charge fees, and forgiven debt may be treated as taxable income.
• •Creditors are not required to agree, and they may continue collection activity or pursue legal action.
• •It is not available in all states and is not suitable for everyone.

A debt-settlement program is offered by a third-party provider, not by Lighter Lending. That provider discloses all costs and terms before you enroll. Consistent with federal law, a settlement provider may not collect fees before it has settled or resolved at least one of your debts and you have made a payment toward that settlement.

Put them next to each other and the contrast is clear:

• •Goal: consolidation restructures debt; settlement tries to reduce the amount owed.
• •Repayment: with consolidation you pay the full balance; with settlement you attempt to pay less.
• •Credit impact: consolidation can help utilization over time; settlement usually hurts your credit, often sharply.
• •Funds: consolidation is a loan that provides funds to pay off balances; settlement is not a loan and provides no funds.
• •Typical fit: consolidation suits people who can afford payments; settlement is aimed at people in or near hardship.

If you have steady income and can comfortably afford a fixed monthly payment, consolidation is usually the option worth understanding first, because you repay what you owe and protect your credit. If you are already behind and a loan is not realistic, a debt-relief program may be one of the options a provider discusses with you, with the caveats above.

Lighter Lending is not a lender or a debt-relief provider. We are a free service that compares personal loan options across a network of third-party lenders from one short form. If a loan is not the right move, you may be presented with other options offered by third-party providers.