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If you’re struggling with debt, it’s easy to wind up feeling overwhelmed, stressed out or just all-around downtrodden. Luckily, there are methods of debt relief available to folks who are finding it hard to stay on top of their finances.

Two of the most popular strategies are debt settlement and consolidation. But while both of these approaches can offer a solution to your debt woes, their effectiveness really depends upon your particular situation. So, to help you make the best choice, here are the key differences between debt settlement and debt consolidation.

The Rundown

Debt consolidation essentially boils down to taking out a new loan to pay off the loans you already have. Consolidation helps to simplify the repayment process and typically results in a lower interest rate. Debt consolidation loans are facilitated through a variety of financial institutions, such as banks and credit unions, and a number of private companies as well. However, It’s important to be aware that many debt consolidation loans require you to put up some form of collateral. It may be in your best interest to consult a professional to help you properly assess any risks before consolidating your debt. You may also want to check your credit before you go shopping around for a new loan. You can get your credit report for free once a year at AnnualCreditReport.com and see your credit scores for free each month on Credit.com.

With debt settlement, a third party will contact each of your creditors to negotiate a better payment arrangement. This can result in a settlement for an amount that is less than what you currently owe. The creditor will consider the debt paid in full and you’ll simply have to repay whatever is left on the settled amount to the debt settlement company. Keep in mind, however, that debt settlement may come with a variety of extra payments and/or fees. For example, some companies require an initial consultation fee or an additional monthly payment to cover their services. You also may want to research the company you are thinking about doing business with to ensure they have a reputable track record. Here are a few questions to ask during the vetting process.)

Which Is Right for Me?

When deciding which debt relief option is best for you, it’s important to take time to reflect on your particular situation and needs. You may want to ask yourself some of the following questions:

  1. Am I having trouble keeping track of all my accounts?
  2. Do I have multiple accounts with extremely high interest rates?
  3. Am I struggling to make payments on time?
  4. Is my credit score too low to qualify for a consolidation loan?
  5. Am I nearing a point where I’ll have to declare bankruptcy?

Asking yourself questions like these can help you diagnose your particular debt problem and make an informed decision. For example, let’s say you determine that your debt-related stress arises from the fact that you’re unable to keep track of the various due dates for all of your credit cards. In this case, debt consolidation might be the best choice for you. On the other hand, if you find yourself really behind on your payments, you might want to consider seeking a settlement.

While both debt settlement and debt consolidation can save you money, neither will relieve you of your debt completely without some form of contribution on your part. Regardless of whichever option you choose, you will still be required to pay back at least part of your debt – they won’t wipe the slate clean. However, providing you adopt good financial habits, you should be able to avoid having to employ these tactics again in the future.

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