Key takeaways: 

  • Debt consolidation and debt settlement offer different ways to pay off your credit card and other debt. 
  • Debt consolidation helps you pay off your debt at a lower interest rate, whereas debt settlement actually reduces the principal amount of debt you owe. 
  • Alternatives to debt consolidation loans include the no-loan home equity agreement option.  

Debt can feel like a heavy weight, leaving you stressed and anxious, and sending you searching for a solution. Along the way, you may come across “debt consolidation” and “debt settlement.” While they may sound somewhat similar, they offer distinctly different ways to pay off your debt. 

Here, we’ll explain how they are different, for whom each is best, and some pros and cons to consider for each. 

Debt consolidation 

Debt consolidation simply refers to combining your existing debts under one umbrella, at a lower interest rate than what you currently have, so that you can pay them off more easily and faster.  

There are many ways to consolidate. One popular way is a debt consolidation – or personal – loan. But it’s not the only way. Other methods include: a balance transfer; using equity proceeds from your home to pay off higher-rate debt; borrowing from a retirement account or life insurance policy; or taking a loan on a vehicle with a clear title. There is no single,” best way” to consolidate and pay off outstanding debt; it will depend on the person and the situation. 

A debt consolidation loan can be a good choice if you are carrying balances month to month on one or more credit card accounts. The idea is to take out a loan with a lower interest rate than you have on your credit cards and use the funds from that loan to pay off all the higher-interest credit card debt. Then you will have just one payment a month – for the debt consolidation loan that bears the lower rate. 


  • Interest rate. Rates on debt consolidation loans can be much lower than the rates on credit cards. Credit card interest rates have been averaging more than 20%, whereas average rates on debt consolidation loans can start around 8% (for people with excellent credit). They can, though, go up to 35% or even higher for those with poor credit. 
  • Firm debt payoff. Most personal loans have terms of 24-60 months. That means there is a deadline for paying off the debt, unlike with a credit card, where you can continue to make minimum payments for years on end.   
  • One loan, one payment. If you have difficulty juggling multiple payment dates, a debt consolidation loan can help. When you have just one payment to make each month, you reduce the risk of late payments and increasing interest on multiple bills. 
  • Lender options. Along with banks and credit unions, independent lenders offer debt consolidation loans. These lenders often can be more flexible in their qualification criteria and look at more factors than just credit scores in determining qualification and the interest rate they offer. 


  • Strict payment schedule. It’s essential to take time to understand the terms and payment schedule, and be absolutely confident you can adhere to it.  
  • Interest rate. Depending on the individual, a home equity line of credit or home equity loan could potentially offer lower interest rates…only IF the person is a homeowner with enough equity in their house to qualify. A home equity agreement, a no-loan option to access your equity, can be a source of funds that comes with no monthly payments – and no interest rates to worry about. 
  • Qualification. Some consumers will not qualify for a debt consolidation loan, or for one at a good rate. In addition to looking at credit scores, lenders often will review your debt-to-income ratio and require a designated number of years of credit history. 
  • Fees. These loans generally come with origination fees of up to 5% of the loan amount. Some lenders charge late fees and/or early repayment fees. 

Debt settlement 

Debt settlement, also known as debt resolution, involves negotiating directly with creditors to reduce the amount of principal you owe on your unsecured debt (primarily credit card and medical debt). It is best for people who are experiencing difficulty in making even minimum payments, and in dealing with the financial impacts of a serious life hardship, such as a divorce, death of family member, loss of a job, or unexpected, major medical expenses. In these cases, they do not have any extra income to put toward debt repayment.  

It is possible to call your creditors yourself and try to negotiate with them. Sometimes, they may work out payment plans or offer a reduction in what you owe if you pay cash. However, many people are not able to, or don’t wish to, negotiate on their own, and prefer to turn to a professional debt settlement firm. Creditors are accustomed to working with these firms. 


  • Debt reduction. Debt settlement reduces the total principal you owe on your debt. 
  • One monthly debt payment. In debt settlement, you will save money for the negotiated settlements in a special account. The amount you put into the account each month will usually be quite a bit less than the minimum payments you are making.  
  • Viable alternative to bankruptcy for many. Debt settlement programs typically provide better repayment terms than do Chapter 13 bankruptcy filings, and do not leave a permanent bankruptcy judgment on financial records. 
  • No conflict of interest with creditors. A debt resolution firm takes no payments from credit card companies. 


  • Negative short-term impact on credit. The process can reflect negatively on credit reports and scores, although scores rise quickly once you have settled your debt. 
  • Calls from collection agencies or creditors. During debt settlement, you may still get calls about unpaid accounts, and agencies and creditors may even initiate legal action. A good debt resolution provider will support their customers through the situation if it arises.  
  • Fees and interest. These accumulate during the negotiation period, and should be taken into account when calculating savings. 

Both debt consolidation and debt settlement require a real commitment to getting out of debt and to budgeting, and often, a fair amount of belt-tightening. No matter what method you are considering to help eliminate your debt, be sure to take a look at the real reason you accumulated the debt in the first place. That way, you can address the issue and look at ways to avoid getting into the situation again. 

The blog articles published by Unlock Technologies are available for informational purposes only and not considered legal or financial advice on any subject matter. The blogs should not be used as a substitute for legal or financial advice from a licensed attorney or financial professional. Links in our blog posts to third-party websites are provided as a convenience and are for informational purposes only; they do not constitute an endorsement of any products, services or opinions of the corporation, organization or individual. Unlock Technologies bears no responsibility for the accuracy, legality, or content of external sites or that of subsequent links.