Debt Settlement Vs Debt Consolidation: What's The Difference

Dealing with debt can be overwhelming, stressful and sometimes impossible to get on top of. And unfortunately, it’s a financial issue many Australians have in common. According to financial comparison site, Canstar, the average Aussie has $17,700 of personal debt.

Two popular debt negotiation options are debt consolidation and debt settlement. While both options aim to help you manage your debt, they work differently. This blog will explore the differences between the two, ensuring you choose the right solution for your circumstances.

Debt settlement 

Debt settlement is when you or a third party negotiates with your creditors to settle your debts for less than what is owed. 

Whether you are negotiating with your creditors on your own or through a third party, the first step to debt settlement is to contact your creditors and inform them of your financial circumstances. Many debt settlement companies also ask you to stop making payments during this time and instead funnel the money into a savings account, which will be used to cover their fees. 

You or the negotiator will propose a settlement offer, which your creditors will accept, reject or counter. Once a settlement agreement is reached, you must make the agreed-upon payment and the debt is considered settled.

While debt settlement can drastically reduce your debt levels and help you get back on your feet, there are some things to be aware of. For instance, your credit score may take a hit since you’ve paused payments during the negotiation stage, and you may be subject to hefty fees by your creditors. 

Debt consolidation

Debt consolidation involves combining multiple debts into one monthly payment. This is often a popular choice for those with multiple debt types with high interest rates. Debt consolidation can be done in a few ways, including a debt consolidation loan or balance transfer credit card. 

If you choose to take out a debt consolidation loan, you'll need to find a lender who offers these and submit an application. If approved, the loan funds will be used to pay off your existing debt and your repayments will now go to your new lender. 

If you opt for a balance transfer credit card, you must transfer your existing balance to the new card. These cards feature a 0% interest introductory rate for a fixed period, so select a card that gives you enough time to pay down your debt interest-free. 

Though debt consolidation can deliver financial relief, it’s important to remember that this solution is not a quick fix for financial problems. It requires discipline and commitment to stay on top of payments and avoid taking on new debt.

Debt settlement vs debt consolidation — which is the right option for me?

Debt negotiation in any form has its benefits and drawbacks. The most important thing to remember is to select the solution that aligns with your lifestyle and is more likely to get you debt-free for good. You will also need to consider your long-term financial goals and ensure your debt negotiation solution will assist in achieving them.

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