What is debt consolidation?
Debt consolidation is a process used to pay off debt from several different creditors by combining them into a single loan. Depending on your personal financial situation, debt consolidation may help you improve your credit health.
What are the pros of debt consolidation?
There are several potential benefits of debt consolidation.
Simplify your finances
If you owe money to multiple creditors, you might find it difficult to manage all those balances—each with its own interest rate, minimum payment, and payment due date. In addition, if any of that debt has variable interest rates, your monthly payments might fluctuate. That makes your financial picture even more complex.
When you consolidate multiple higher-interest balances into one fixed-rate personal loan, you will have one set regular monthly payment that you can build into your budget, and you can circle the day on the calendar when your debt will be paid off.
This may simplify your finances and make it easier to budget. In fact, 85% of surveyed debt consolidation customers told us their Discover personal loan was simpler than their other financial options.*
Save money and time
With debt consolidation you will eventually need to pay off the full amount of debt you have. This is an important difference between debt consolidation and debt settlement.
But a debt consolidation loan could help you save money on interest. Use our debt consolidation calculator to estimate your potential savings.
A personal loan could also help you pay down debt faster. 88% of surveyed debt consolidation customers told us they expect to pay off existing debt sooner with a Discover personal loan, with the majority of them reporting that they will pay it off an average of 2 years earlier.*
With your debt paid down you’ll be able to focus on your longer-term financial goals.
What are the cons of debt consolidation?
There are also some potential drawbacks to debt consolidation.
There is a variety of possible fees
Some lenders charge fees, such as origination fees, closing costs, prepayment penalties, or late fees. When charged, these fees can add to the amount you would need to pay back.
With Discover Personal Loans there are no fees at all as long as you pay on time. In February 2024, a Discover Personal Loans customer summarized their experience: “Simple, smooth easy process to get a personal loan with no origination fees! How cool is that...it's way cool.”
It doesn’t change your habits
Consolidating debt won’t keep you from taking on more debt than you can handle in the future. The best way to stay on track financially is to develop good money habits, like sticking to a budget and prioritizing savings.
You might pay more in interest
In general, debt consolidation may be a great way to save money on interest. However, it’s important to pay attention to the length of the repayment term that you select. For example, choosing a longer term for the loan could lower your monthly payments, but it might cost you more in total interest in the long run.
What is debt settlement?
Debt settlement is the process of negotiating an agreement with one or more creditors to pay less than the full amount you owe.
With debt settlement, you might be able to settle one large debt or several smaller balances. If you’re able to negotiate a settlement with your creditors, you may reduce your overall debt, avoid filing for bankruptcy, or pay off your debt sooner.
While you may be able to negotiate directly, some people might benefit from working with a professional, either a debt settlement consultant or an accredited debt counselor. It all depends on your personal situation.
What should you know about debt settlement?
There are several things to keep in mind when considering debt settlement.
It might not be an option
Your creditor is under no obligation to settle the debt for less than what you owe and may simply refuse.
Your bills will keep coming
While you’re negotiating or paying on a settlement, your bills will continue to come. That means your debt can grow as interest costs add up.
It may hurt your credit score
Your credit score could be damaged if you miss payments or even from the settlement process itself. These issues may affect your credit report and your credit score for up to seven years and may make it difficult for you to borrow money in the future.
You might have to pay it all at once
In exchange for settling for a reduced amount owed, you might need to pay your creditors in one lump sum. Depending on your situation, this amount could be more than your original monthly payment or your monthly payment after debt consolidation. In some cases, it might be more than half of the total amount you owe. There may also be tax implications that add costs.
You might need professional advice
If you are struggling with debt and worrying about bankruptcy, it may make sense to consider debt settlement. Because there are risks involved, you may want to talk with a tax professional or financial advisor, even if you don’t work with a debt counselor. You will want to be sure you understand the details and what they mean for you and your financial goals.
Debt consolidation vs. debt settlement: which one is better?
As with all financial decisions, your specific situation will determine which option is better for you. Be sure to consider these key things while you weigh the pros and cons of debt consolidation and debt settlement:
- You might pay less overall with debt settlement, but you will still need to pay the negotiated debt over time or in a lump sum. Make sure that doing either will not cause you more financial problems.
- Debt settlement might hurt your credit score, making it harder to borrow money in the future.
- With debt consolidation you pay one creditor instead of several. You still pay off the original amount you owed, but you can do it over time, with one set regular monthly payment that fits your budget.
- Debt consolidation could save you money in interest if you consolidate several higher-interest balances into one lower, fixed-rate personal loan.
- In the end, whether you choose debt consolidation or debt settlement will depend on your financial situation.
If you’re looking to consolidate debt, check out how much you could save on interest with a personal loan.
