Home Debt Consolidation Debt Consolidation Loan vs. Debt Settlement: the Pros and Cons

Debt Consolidation Loan vs. Debt Settlement: the Pros and Cons

Published May 2021 by Jordan Semprevivo

If you are reeling under the burden of debt, you should take action now and explore what debt resolution options are available to you. Here we take a look at the pros and cons of a debt consolidation loan vs. debt settlement.

Key Points: 

  • Debt consolidation simplifies your debt payments. Debt settlement, on the other hand, reduces your debt.
  • Debt consolidation requires strict financial discipline to ensure you don’t acquire more debt.
  • Debt settlement can be a viable solution if you are already struggling financially.

If you are reeling under the burden of debt, you should take action now and explore some of the debt resolution options available to you, such as credit counseling, debt settlement, bankruptcy, or debt consolidation

To learn which of these solutions best suits your situation, contact a ClearOne Certified Debt Specialist at 866-481-1597 to request a personalized debt resolution plan. 

Two of the most popular debt resolution options are debt settlement and debt consolidation. Take a closer look at these potential solutions and compare their pros and cons. 

Debt Consolidation Pros and Cons

If you are falling behind on your credit card payments or you are already making only minimum payments on several cards, your debt load has overwhelmed you. It is time to consider a debt consolidation loan. What can you hope to achieve by paying off one debt with another? 

What are the pros of debt consolidation loans? 

  • By replacing the multitude of high-interest debts you have with a single, low-interest, fixed-rate loan, you simplify your debt equation. The ideal debt consolidation loan relieves you of some debt burden by giving you lower monthly carrying costs and a finite payback period.
  • A debt consolidation loan only makes sense if it lowers your interest rate. For that, you need an excellent credit score. When you fall behind on credit card payments, your issuer can raise your interest rate, thus making it even more difficult for you to catch up. 
  • Debt consolidation allows you to pay off all of your credit cards. Thus, you may be able to improve your credit score. 

Pro tip: Do not start using your credit cards after you secure a debt consolidation loan and pay them off. If you do, you will defeat the purpose of debt consolidation. Try to start up an emergency savings account instead. 

What are the cons of debt consolidation loans?

  • A debt consolidation loan will not reduce your debt. You will still have to pay back every penny. Furthermore, if you do not accompany your debt consolidation with a radical spending reduction, you may only compound your debt problem.
  • A debt consolidation program will take 2-5 years to complete. You have to make financial discipline a habit to succeed with it.
  • You cannot get a decent debt consolidation loan with a questionable credit score. If your credit is less than ideal, you should take a close look at debt settlement. 

Debt Settlement Pros and Cons

The least expensive debt resolution method, debt settlement saves you money by convincing creditors to forgive some of your principal amount owed. If your debt problem is acute enough to have affected your credit score, debt settlement may be your best option. 

Credit score

What are the pros of debt settlement?

  • Debt settlement entails no upfront costs. It has been illegal since 2010 for debt settlement companies to accept upfront payments from their clients.
  • The savings resulting from debt settlement are often substantial.
  • Debt settlement works for many. According to an American Fair Credit Council report, 67 percent of those who enrolled in a debt settlement program settled at least one account, and 50 percent settled two accounts. The savings resulting from the program exceeded the settlement fees in 96 percent of the cases studied. 

When you enroll in a debt settlement program, you begin making payments into an escrow account where funds begin to accumulate which will be used to settle your debts. Then, the company negotiates a debt reduction with your creditors on your behalf. 

What are the cons of debt settlement?

  • Stopping payments may result in additional late fees, penalties, and pressure from your creditors.
  • Debt settlement may negatively impact your credit score. 
  • Your debt settlement company charges a fee for its services. However, 96 percent of the time, the savings exceed these fees.
  • You may have to pay income tax on your forgiven debt amount. 

If you are struggling financially, debt settlement can be the way out of the debt trap that you need.  and get a free savings estimate to see how much debt settlement can save you.

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The information provided is for informational purposes only and is not intended to provide lending or financial advice. ClearOne Advantage is not a lender, credit repair or consumer credit counseling company. ClearOne Advantage doesn’t provide lending or financial advice. Please consult a certified financial advisor for individual credit and lending advice.

Topics: Debt Consolidation