Debt Consolidation vs Debt Settlement | PrimeWay Federal Credit Union

“If you think nobody cares about you, try missing a couple of bill payments.” – Steven Wright

Everyone from Walt Disney to Abraham Lincoln had something to say about debt. That’s because they’ve been there too. Walt Disney filed for bankruptcy just after his teenage years. Lincoln turned around after his business failed and ran for political office with the equivalent of $28k of debt by today’s standards. But, never have there been better tools at your disposal to handle debt than now!

There are two similar-sounding approaches to resolving debt you may have heard of before: debt consolidation and debt settlement. One is far more favorable, and the other should be treated only as a last resort. More on that later.

Here’s the common ground these tools share: they both apply to individuals trying to resolve debt. That’s it.

Now, let’s discuss how they’re different. Deep breathe. You got this!

What Is Debt Consolidation

Debt consolidation is simply when you combine multiple debts, typically high-interest debts, into one debt payment plan. In this instance, the goal is to obtain a lower interest rate and a favorable payment structure. Many times, this is accomplished with a debt consolidation loan. 

When to Consider Debt Consolidation

• You have a lot of high-interest debt. There are many indicators you might have too much high-interest debt. For example, your debt payments may be higher than your income, you may be missing payments, or your credit score reporting may indicate this as something to address.
• You are having trouble keeping track of too many debt payments each month. Again, it's easy to get overwhelmed, and many of us have been there.
• Your debt is starting to snowball. A debt snowball has many faces. One might be that you're triggering late fees, which only increase your monthly payments. Another might be that you're low on cash to pay many of your bills, and something unexpected comes up, causing you to take out another loan or use your credit card more. 
• You have high credit card debt or high balances on revolving credit. Each of these contributes to bigger impacts on your credit score and typically has higher interest rates. When you use more than 30% of the available balance on your credit cards, your credit score begins to decline. So, this type of debt is a perfect candidate for a consolidation loan. By rolling this kind of debt into a consolidation loan, you can lower rates, allow yourself to pay less overall and pay off debt faster and can lift your credit score.

What Is Debt Settlement

Debt settlement should be considered a last resort and is very risky. This situation usually occurs when debt payments have become severely delinquent or the payer is in default. So, the person paying the debt seeks a settlement with the creditor, the entity that is owed money. This typically includes a third-party company to help negotiate a smaller lump-sum payment than the debt owed to "settle" the debt. But, things are far from "settled."

Going this route could end up costing you more than the debt owed when everything is finally over. Also, a debt settlement will affect your credit for several years and will likely lead to a large initial drop in your credit score. Some estimates suggest as much as 100 points or more. The creditor may also try to seek further restitution with a lawsuit. 

When to Consider Debt Settlement

• Your payments are far into delinquency or you have defaulted on payments entirely.
• To avoid bankruptcy.
• Your credit score has already been severely impacted. 

Where to Go From Here

Now that we’ve finished with the tough stuff, let’s leave you with something important to keep in mind. You are not alone when it comes to handling your debt and it does not have to be complicated. As you can see, there is a long history of people who’ve been where you’ve been and they turned out okay. The point is we are here to provide a path forward for you. So, give our debt coach a try or see what a debt consolidation loan could do for you. We’ll help you take positive steps towards restoring your financial life.

Debt Consolidation Loan 

For many who encounter mounting debt, a debt consolidation loan can help. Keep reading below to learn about the services PrimeWay provides for debt consolidation.