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What is Better – Debt Consolidation or Debt Settlement?

Debt settlement and debt consolidation loans are two ways to immediately repay your creditors. As both are attractive options we’ve broken down how to find out what is better – debt settlement or debt consolidation loans, based on your circumstances.

Here is some of the questions you may need to consider before deciding what is better, a debt settlement or debt consolidation loan:

  • How do debt consolidation loans and debt settlement affect your credit score?

  • What is involved with negotiating a settlement with your creditors?

  • How do you get a debt consolidation loan?

  • What is the best way to settle your debt, depending on your individual circumstances?

What is debt settlement?

A debt settlement is when you repay what you owe to settle your debt by making one payment to your creditors – you may have to contact multiple lenders to completely close accounts. Usually, this will involve requesting, negotiating a settlement with your creditors, and manage debt settlement yourself.

This may be something to take into consideration if you would prefer to free up more of your own time, rather than personally managing your creditors and negotiating a settlement to settle your existing debts.

What are debt consolidation loans?

A debt consolidation loan is the one of debt solutions available to help pay off existing debts with multiple creditors, by consolidating it into one simple payment.

The way it works is that you apply for a loan to borrow the money to pay the amount you owe on existing debts now, so that you only have to repay one lender back.

Debt consolidation loans are regulated by the financial conduct authority (FCA) and there are two forms of debt consolidation:

  • Secured – this is when a loan is fixed against an asset, such as your home;
  • Unsecured – this is when you don’t use an asset as security, but you may have more interest to pay than an unsecured loan

The types of debts that debt consolidation loans cover include:

  • Personal loans;
  • Credit cards;
  • Payday loans;
  • Store cards;
  • Utility debt;
  • Phone debt

When you take on a debt consolidation loan, you pay back one creditor (the provider you take out the debt consolidation loan with), rather than dealing with debt settlements to multiple creditors yourself.

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How does debt settlement work?

For debt settlement to work, you may have received a windfall or possess a lump sum of money. For example, this could be in the form of inheritance or gifted by a family member to repay what you owe. Once you have received your windfall, it’s time for negotiating a settlement with your creditors.

Usually when negotiating a settlement, you will offer the creditor a lump sum which may be less money than the total amount you owe. Your creditor then decides whether or not to agree to this lump sum.

If the negotiations are successful, it may be a good idea for you to get the creditor’s approval in writing so you have a clear record of the agreement you came to with the creditor to refer back to.

A debt settlement should contain a reasonable offer based on what you can afford to pay your creditors. You should calculate:

  • How much you owe your lenders, separated into each organisation;
  • The total size of the windfall;
  • Dividing the total size of the windfall by your debts and working out how much you can afford to pay;
  • Once you’ve made your offers, it is entirely up to the creditors as to whether the debt settlement will be accepted. If not, you may have to look for alternative debt solutions.
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How does debt settlement affect your credit score?

According to Experian, settled amounts from debt settlements remain on your credit history for seven years. However, it’s worthwhile to note that not paying your existing debts can also negatively impact your credit score.

Do debt consolidation loans affect your credit score?

It is possible that debt consolidations loan help your credit as these are one payment which should be affordable for you to pay back, but this is provided that you always meet the monthly payments on time.

It’s recommended to consider your personal circumstances and find out what is the most affordable way for you to pay your debts, whether that is debt settlement, a debt consolidation loan, or other debt solutions.

How debt consolidation is different to debt settlement

Debt settlement often may not be a realistic option for repaying what you owe, as it requires to have the money already, or have the money soon, to clear your accounts. For many, this is simply not an option.

For some, debt consolidation loans may be a more accessible route to managing your debts, as you’ll be effectively provided ‘the windfall’ to repay your creditors in full.

When you’ve cleared your accounts with the funds provided, this may make your finances much easier to manage as you’ll have one interest rate to manage and one payment date to stick to.

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How do you get a debt consolidation loan?

You complete an application online. Even if you have a bad credit history, you can still be considered for a debt consolidation loan. Once you fill in our application form online, our experienced and qualified advisors will work out whether you’re eligible so you don’t have to do the hard work. If approved, you could have the funds you need in less than two hours.

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What is better – debt consolidation or debt settlement?

Although the answer to this question largely depends on your circumstance, for many a debt consolidation loan may be the best solution. After all, you won’t necessarily lose your windfall if you have one and consolidating into one monthly payment may make your finances easier to manage.

While you’ll have to repay your existing debts, this may be at a better interest rate than before, so you may be paying less each month.

To find out whether you would qualify for a debt consolidation loan, click the apply now button below.

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