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What is Better – Debt Consolidation or Debt Settlement?

Debt settlement and debt consolidation are two ways to immediately repay your creditors. As both can be quite attractive options, we’ve broken down what you need to know below so you can determine which option could benefit you.

What is debt settlement?

A debt settlement order is when you repay what you owe by making one payment to your creditors – you may have to contact multiple lenders to completely close accounts. Usually, you’ll have to request, negotiate, and manage debt settlement yourself which can add extra stress on top of your financial situation.

How does debt settlement work?


For debt settlement to work, you should 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 to negotiate the settlement with your creditors. For the negotiations to stand a good chance of success, you should ensure:

  • You can’t currently keep to your debt repayments. This situation is unlikely to change in the future.

  • The windfall will only be available temporarily. For example, in the event of inheritance, you’re in a position to use this for debt repayment now but – in a few weeks – this will likely be used on day-to-day expenses.

  • If the negotiations are successful, make sure you get the creditor’s approval in writing.

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 an alternative solution.

How debt consolidation is different to debt settlement

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

Debt consolidation is more accessible as you’ll be effectively provided ‘the windfall’ to repay your creditors in full. This means no negotiations to do and your efforts aren’t dependent on whether a lender chooses to accept your terms.

When you’ve cleared your accounts with the funds provided, you’ll just have one lender to repay –the debt consolidation loan provider. However, this should make your finances much easier to manage as you’ll have one interest rate to manage, one lender to communicate with, and one payment date to stick to.

What is better – debt consolidation or debt settlement?

Although the answer to this question largely depends on your circumstances, it’s hard to see when a debt consolidation loan would not be the better choice. After all, there’s no negotiation with lenders and you don’t lose your windfall.

While you’ll have to repay what you owe, this should be at a better interest rate than before – meaning you’ll likely pay less each month.

To find out whether you would qualify for a debt consolidation loan, click the button below. If approved, you could have the funds you need in less than two hours.

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