Debt Consolidation vs. Debt Settlement: Which is Better to Get Out of Debt?

Financial Wellness By Noah - November 5, 2020

If you’ve found yourself in a significant amount of debt, clearing this financial hurdle is an important priority. Debt consolidation and debt settlement are both options for resolving debt, but that’s largely where the comparison ends. These methods employ very different tactics, and have much different ramifications for your credit score and the timeline before you are free of debt.

What Is Debt Consolidation?

Debt consolidation is a debt management strategy in which you combine multiple debts into a single payment. The basic idea is that consumers can save money and time by transferring debt to a lender with lower interest, and that it’s simpler to deal with one lender than balance multiple debts to different lenders. So how does debt consolidation work? Here’s an example: 

If you owe one creditor $50 per month at 18.99% interest, another creditor $50 per month at 9% interest, and a third $50 per month at 24.99% interest, you could take out a consolidation loan and settle all three debts. Then, you’d owe the new lender $150 per month under a single interest rate. If you’re strategic about consolidation methods, you might even be able to get a decreased interest rate. Average debt consolidation loan interest rates are around 18.56%, comparable to some credit cards, but a strong credit score and short loan term could help your chances of getting a rate as low as 4.52% to 7.37%.

What’s the smartest way to consolidate debt?

The two main ways to do this are to use a 0% interest, balance transfer credit card, or to take out a debt consolidation loan. The credit card option is often only available for people with a credit score around 680 or higher, and the 0% interest rate is usually in effect for a 12-18 month promotional period. It may also incur a one-time balance transfer fee.  Typical debt consolidation loans typically come with interest rates that can easily be as high as a credit card, but they may be more widely available for people with lower credit scores. 

The main advantage of debt consolidation is that it’s easier to pay monthly debts to a single lender, and you may be able to secure a lower overall interest rate on your debt. Important drawbacks are that if you extend the repayment period to lower monthly payments, you could pay more in total by adding interest. Debt consolidation loans may also use assets like your home or car as collateral.

What Is Debt Settlement?

Debt settlement is a process where you offer the lender a lump payment up front — often less than the total amount you owe — in order to remove your debt. It seems strange to imagine that a lender would happily agree to accept less than what you owe, until you take into account that 10% of Americans expect to take 10 years to pay back credit card debt, and others don’t ever expect to repay the balance. Some lenders would rather get what they can immediately than hold out hope of receiving the full balance in a decade or more.

That said, lenders don’t have to work with you on a settlement. It can take months or even years of negotiation to convince them to work out an arrangement. It’s also extremely important to get all the details in writing, including an official statement that the debt is considered satisfied. The last thing you want is to scrape together a lump sum settlement and then have the lender come after you for the remainder anyway.

The main advantage to debt settlement is that it gets rid of a debt altogether. The downside is that the process can be lengthy, complicated, and stressful. Debt settlement can also negatively impact your credit score. Settlement is a better option than bankruptcy in most cases, but it’s better to stay current on debt payments than “save” money with a settlement.

Which is Better Debt Consolidation or Debt Settlement?

The right debt relief strategy for you depends on your circumstances. It’s always important to research your options carefully before entering into a new financial agreement.

That said, debt consolidation has some important advantages over debt settlement, especially in terms of your credit. Debt consolidation can lead to a dip in credit because loans or a balance transfer credit card application require a hard inquiry on your credit. This should only be a temporary dip of a small number of points. Depending on how well you commit to paying your debt consolidation loan payments on time, you could see your score improve or worsen. You’ll have a longer period of time before you’re debt free, but if you play your cards right, you can be on good financial footing by the time you send your last payment.

Debt settlement, in comparison, is only available once your account is delinquent. A creditor isn’t going to be open to lowering the amount they accept if they’re receiving regular payments. Missed payments will hurt your credit. Then once you’ve missed enough payments to open negotiation, you’ll miss more during the lengthy process of agreeing on a settlement. The settlement itself will also reflect negatively on your credit report, showing up as a zero balance, but with a note that the account was settled for less than the amount owed. All this remains on your credit report for seven years, which can seriously impact your ability to apply for business loans, a new mortgage, or other major financial agreements.

Families who are already delinquent on loans and struggling to get their head above water may turn to debt settlement as a last measure. But if your debts are current or even only one or two missed payments behind, you may find that debt consolidation is much better for your financial health in the long run. You may be wondering, what are alternatives to debt consolidation?

How Noah Can Help

At Noah, we’ve seen that a house can be much more than a roof and four walls. It’s also a major source of many family’s wealth, often your most valuable asset. We believe using your home equity wisely can be part of a healthy approach to family finance – which is why our mission is to help homeowners unlock the wealth in their homes.

Getting out of debt can feel like an almost insurmountable hurdle, especially because some options like debt consolidation replace debt with...well, other debt. Some homeowners are relieved to hear about Noah's Home Value Investment which helps homeowners access funds they need without adding debt to their official financial profile. Noah’s Home Value Investment is not a loan. There’s no interest and no monthly payments to factor into your budget. You can use part of the equity you’ve grown in your home to pay off debt in a way that fits best for your long-term financial health. That may help explain why, of all the funding Noah has provided to homeowners since 2016, 33% of those funds have gone directly to pay off debt. Find out if Noah is available in your area and how much you qualify for, without impacting your credit score.


Tackling debt can be an important financial and personal goal. You feel better when you’re not worrying about how to pay multiple creditors. The method you choose to pay off debt can have a big impact on your financial life afterward. Research your options carefully, and choose the debt relief method that’s most sustainable and healthy for your family.