Loan Consolidation

The terms debt consolidation and debt settlement are often used interchangeably—but there are some important differences.

Most significantly, debt settlement is a form of debt relief that involves hiring and paying a third-party company to negotiate a lump-sum payment that each of your creditors will accept in lieu of paying the total outstanding balance. These settlement companies typically charge a fee between 15% and 20% of the total debt amount.

In contrast, debt consolidation requires the borrower to pay their full debt balances using funds from a new loan. Unless there are origination fees or other administrative fees, borrowers don’t have to pay anyone to complete the consolidation process.

Instead, the debt consolidation process requires borrowers to take inventory of their debts and develop a plan to pay them off in a more streamlined—often less expensive—way.

When consolidating debt, a borrower applies for a new loan, balance transfer credit card or other consolidation tool through their bank or another lender. In the case of a debt consolidation loan, the lender may pay off the borrower’s other debts directly—or the borrower will take the cash and pay off his or her outstanding balances.

Whether a borrower should choose a balance transfer card or personal loan to consolidate credit card debt comes down to the interest rates offered and which repayment arrangement is best for their budget.

Once the borrower’s preexisting debts are paid off with the new funds, the borrower will make a single payment on the new loan each month. While debt consolidation may lower the amount a borrower owes each month, it accomplishes this by extending the loan period of the consolidated loans. Consolidating debts also streamlines payments and makes it easier to manage finances—especially for borrowers who struggle to manage their money.