debt consolidation vs. debt settlement

Debt Consolidation vs. Debt Settlement: Which is Better?

Debt consolidation focuses on simplifying your debt repayment by combining multiple debts into a single payment. This approach helps manage payment schedules and reduces the stress of dealing with multiple creditors.

Debt settlement, on the other hand, aims to reduce the total amount of debt owed. While it can lead to significant debt reduction, it may also damage your credit score as a side effect.

Understanding the key differences between debt consolidation and settlement is crucial for making an informed decision. Choosing the right debt relief strategy depends on your financial situation and desired outcomes, ultimately helping you better manage your debt.

Debt Consolidation vs. Debt Settlement

Are you still puzzled by the two debt relief options? Take a look at the comparison table below to better understand their key differences and determine which one might be more suitable for your situation:

Debt Consolidation Debt Settlement
Debt Management Combines multiple debts into one Reduces the total amount of debt owed
Ease of Payments Simplifies payment schedules Can lead to significant debt reduction
Stress Reduction Reduces stress from multiple creditors May damage credit score
Debt Reduction Does not reduce the amount owed Involves negotiation with creditors
Interest Rates & Payment Options May lead to lower interest rates Can result in a lump sum or installments
Credit Score Impact Less impact on credit score Greater impact on credit score


So, is it better to consolidate or settle your loan?

Debt consolidation is generally better for those looking to simplify their debt repayment by combining multiple debts into one, while potentially benefiting from lower interest rates and less impact on credit score. 

On the other hand, debt settlement is a more suitable option for those seeking to significantly reduce their total debt amount through negotiation with creditors, but it often comes with a greater impact on credit score. 

Ultimately, the better choice depends on your individual financial situation and your priorities in managing your debt.


More on Debt Consolidation

Debt consolidation is a debt management skill reorganizing your existing debt into one. A re-structured loan program may result in a unitary plan with only one repayment schedule and interest payments.

You may not lessen a debt burden as it is a reorganized exercise. Still, a revised loan plan may reduce your interest payments or modify your repayment period to your benefit.

How it Works

By streamlining your debt, you have one straightforward loan combining all the past multiple debts and get a precise debt amount and repayment dates. Besides, you may shorten your repayment time and save interest costs. A financial institution offering a debt consolidation loan may charge you an origination fee.

A loan consolidation plan can be a secured or unsecured plan. A secured plan requires assets like a house, an insurance policy, a car, or a retirement account as collateral against a consolidated loan. 

If a borrower defaults on the loan, a lender may confiscate the collateralized asset to repay the loan with interest. Furthermore, your credit score may deteriorate and affect your future borrowing credibility.

Types of Debt Consolidation

The following debt consolidation loans are popular in the market:

  • Personal Loan: It is an unsecured loan offered by a bank or other financial institutions to pay off your existing debt. Ultimately, you can only repay your new debt consolidation loan and interest with the bank or financial institution. All you need is a strong credit score in using personal loans.
  • Home equity loan/home equity line of credit: The secured loan uses your home as a pledge to offer cash or a line of credit to pay off your outstanding debt. 

A home equity loan charges lower interest than an unsecured loan. However, you may risk losing your home to a bank if you cannot repay the loan.

  • Balance transfer credit card: A loan transfer from a new credit card to settle your existing debt from your current credit cards or other loans; the benefit is lower interest payments or better repayment schedules. But the transfer program requires you to have a good credit score history.
  • Mortgage refinancing: Unlike a home equity loan, mortgage refinancing involves taking a new loan from your existing home on a mortgage, where you pay off your existing mortgage and also other debt with the new loan. 

The new loan may have lower interest costs but requires a fee to process the new loan.

Pros and Cons


  • Faster debt pay-off: By integrating all your debt into one plan, you can better manage your finances to your benefit, like shortening repayment time, besides focusing on one plan and one payment only each time. And you can eliminate hassles like multiple repayment dates and amounts to be paid without delay.
  • Lower interest expenses: You can benefit from a consolidated loan plan, which offers a lower interest rate and payment terms. The higher the loan amount, the more interest you will save. The extra savings from interest payments can be a source of the following debt repayment.
  • Improved credit score: Another valuable benefit is the enhanced credit report. If you stick to the planned schedule, a quick pay-off allows you to go debt free. Moreover, you may improve your credit score by paying off your loan earlier. You may get a lower interest rate and payment terms next time you apply for a new loan.


  • Extra fees: A bank or financial institution may charge you an origination fee if you agree to consolidate debt. Collected at the first payment or spread evenly on future monthly payments, the extra fee will be a cost to a borrower.
  • Not a solution: Debt consolidation cannot solve a debt problem but only re-arranges the puzzle. You should still repay the principal with less interest in each monthly payment.
  • Higher costs: Debt consolidation is a technique, not a debt elimination. Therefore, if you cannot pay on time or are delinquent on the new debt, you may face more penalties and higher interest costs, leading to a deteriorating credit score and hindering your borrowing ability in the future.

stressed man looking at papers

More on Debt Settlement

Debt settlement is, through negotiating with creditors, about paying off the debt in a reduced debt amount owed. In the process, creditors must agree on your proposals for a debt settlement plan.

You may hire a debt settlement company to represent you to negotiate with creditors. Like other negotiations, the outcome may be completely different from what you proposed or expected before, no matter whether you or your representative joins the discussion.

How it works

Debt settlement should be the last option when you exhaust all others. Experts advise reviewing other available alternatives based on your financial situation. 

You start negotiating with your creditors after being seriously delinquent on your debt. Or you can hire a debt settlement company to talk terms with lenders on your behalf if you are not willing and think a professional can do a better job for you.

Debt settlement companies charge 15% to 25% of the total debt reached for compensation. You should be cautious about these companies’ remunerations, criticized by authorities for making debtors generally overstretched in finance.

A debt settlement company will set up a particular account, where you should put the agreed amount of money, in the process, used to pay off debt after negotiations. The difference between original debt and revised money owed after the settlement is treated as taxable income.

Types of Debt Settlement

Three debt settlement programs are available to debtors finding it difficult to pay in Singapore:

  • Debt Management Program: Offered by Credit Counseling Singapore, the program allows debtors to repay unsecured loans, such as credit card, overdraft on a monthly repayment basis. The repayment program last 5 to 10 years, depending on a debtor’s financial capability.
  • Debt Repayment Scheme: also called the pre-bankruptcy scheme and administered by the Official Assignee(OA) of the Ministry of Law’s Insolvency Office, the scheme allows participants to pay back debt within a maximum period of 5 years. It will not impose any financial and travel restrictions.
  • Discount Lump Sum Settlement: It is a one-time pay-off, like a lump sum, of a loan through negotiations with banks. However, a debtor must have the resources to pay for his liability with financial institutions.

Pros and Cons


  • Debt reduction: A successful debt settlement reduces the debt you have to repay. Creditors like banks may be willing to sit down and accept a modified repayment plan with your commitment after long-time delinquency. The ultimate repayment sum is less than the original earlier. You will face legal challenges, for example, bankruptcy, if you break the plan’s rules.
  • Bankruptcy avoidance: A debt settlement is the last option before bankruptcy. The option is the last chance offered by creditors to recover their loans and allows you to pay off your agreed-upon debt without further exhausting both parties’ resources and time in the future.
  • Earlier debt pay-off: A successful loan settlement plan shortens the payment period besides debt amounts. You may clear your debt as early as possible if creditors agree to a settlement proposal you offer. You should beware of further charges included in a new repayment plan due to origination.


  • Damaged credit score: A debt settlement program requires you to stop all other payments to other debts so that you may risk further damage to your credit score due to late payments and loan collections. It is also possible not all creditors agree with the settlement proposal, which leads to deteriorated credit ratings, which may last for 7 years.
  • High fees: Creditors may charge various fees like origination and administration fees to implement a new plan. Furthermore, if you hire a debt settlement company to negotiate for you, a further 15% to 25% fee may be possible to increase your debt burden. Sometimes, a debtor may even shoulder a 60%+ fee for an enrolled debt.
  • Risky business: If you have one more creditor for settling your proposals, chances are they may likely reject your plan. The more creditors you have, the more probable you cannot get them to a negotiating table. It may become difficult to settle your loan problem or even erode your credit score.
  • Tax implications: Debt forgiven due to a settlement plan may subject you to tax. You should check with the Inland Revenue Authority of Singapore(IRAS) for the latest update.

Read Also: Debt Consolidation vs Personal Loan


Debt consolidation and settlement clearly lead to different outcomes. Whichever option you choose depends on, besides your financial situation, your resolve in line with your objectives and strategies. If the former fails, you should prioritize consolidating your loans before negotiating a final settlement solution. It may hurt you least at all financially, provided that you must choose either one.

Key takeaways

  • Debt consolidation is a debt management skill that involves reorganizing all your debt into one.
  • Debt settlement is about a debt re-restructure through negotiations with creditors aiming to a pay-off with a lump sum or installments.
  • Debt consolidation does not reduce amounts owed, but debt settlement does.
  • Debt settlement may damage a credit score if one or more creditors do not agree with a debt settlement plan.
  • Debt consolidation may improve a debtor’s credit score in the long run.

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