Should you take out a loan or hire outside help to manage your debt?
What are the key differences?
While both debt consolidation and debt relief can help you lower your monthly repayments and save money on interest, only debt relief can help you negotiate down your debt load. Consider these differences when deciding which option to choose:
|Debt consolidation||Debt relief|
|Consolidates debts into one single loan||Y||N|
|Lowers monthly repayments||Y||Y|
|Saves you money on interest||Y||Y|
|Can improve your credit score||Y||Y|
|Negotiates down your debt load||N||Y|
Compare debt consolidation loans and debt relief companies
What is debt consolidation?
Debt consolidation is a way of combining all of your monthly debt payments into one, typically with a loan or balance transfer credit card. Debt consolidation can help you organize your monthly payments, score more competitive rates and terms and give you a pathway out of debt.
Types of debt consolidation
There are four main types of debt consolidation:
- Debt consolidation loan. Take out an unsecured term loan to pay off multiple types of debt, including personal loans and credit cards. You then repay the loan plus interest and fees over a fixed period of time — usually three to five years.
- Balance transfer credit card. Combine multiple credit card balances into one card. Many balance transfer credit cards come with a promotional 0% interest rate, giving you between six and 18 months to pay off your balance without interest adding up.
- Home equity loan. Use your home as collateral on a personal loan to consolidate your debt with more competitive rates and terms — though you risk losing your home if you can’t pay it back.
- Federal student loan consolidation. Move all of your federal student loans into one with a federal Direct Consolidation Loan. While you won’t necessarily get a lower interest rate, it can help you qualify for more flexible repayment plans and certain types of forgiveness.
What is debt relief?
Debt relief is a way to reduce what you owe when debt consolidation isn’t enough. Debt relief companies typically work with your creditors to lower your balances or come up with a payment plan. While it can help you wipe the slate clean, it can also damage your credit score in the process.
Types of debt relief
There are four main types of services that debt relief companies offer:
- Debt settlement. A debt settlement company negotiates with your creditors to reduce how much you owe — for a fee. While the company negotiates, you can either save up for a one-time repayment to settle your debts or pay them off in installments over three to five years.
- Debt management. A credit counseling agency negotiates with your creditors to come up with a payment plan you can afford, typically with a lower interest rate or longer term.
- Credit counseling. Attend workshops or work with a financial adviser to reorganize your personal finances to come up with a plan to get out of debt and stay there. Credit counseling agencies often also offer credit repair services.
- Bankruptcy services. Get referred to lawyers and other services that can help you negotiate the bankruptcy process when debt relief isn’t enough.
How does a debt relief program affect my credit?
It depends on which program you sign up for. Debt settlement can hurt your credit if you stop making repayments on your loans or credit cards while you’re enrolled in the program or if you don’t stay with the program. Worse, you could end up needing to file for bankruptcy if debt settlement doesn’t work — this can stay on your credit report for seven to 10 years.
Signing up for debt management can generally improve your credit score in the short term, as can other credit counseling services.
Which one is right for me?
Whether debt consolidation or debt relief is right for you depends on your particular situation. Debt consolidation is more of a quick fix for unmanageable debt, while debt relief is a more extreme solution.
Choose debt consolidation if you need help managing your debt and have good enough credit to qualify for a loan with a competitive rate.
Pros of debt consolidation
- Manage repayments. Debt consolidation moves all of your monthly repayments into one.
- Lower rates. Personal loans typically have lower interest rates than credit cards — though some balance transfer cards often have a 0% promotional APR for the first year.
- Lower repayments. Getting a long-term debt consolidation loan can give you lower monthly repayments.
Cons of debt consolidation
- Not a long-term solution. Debt consolidation won’t help you stay out of debt — it’ll just help you pay off the debts you currently have.
- Not great for large debt loads. This option likely won’t help if your debt load is over half your income.
- Good credit required. You likely won’t qualify for a competitive deal if you don’t have good to excellent credit.
Choose debt relief if you’re already behind on your repayments or don’t have the credit score to take out a debt consolidation loan.
Pros of debt relief
- Reduce your debt load. Debt settlement can reduce how much you owe to your creditors, making it easier to wipe the slate clean.
- Affordable repayments. Whether you choose to pay off your debt all at once or in installments, debt settlement and management can help you negotiate a payment plan you can afford.
- Improve your credit in the long run. Credit counseling agencies offer services that can help you improve your credit score so you can qualify for more favorable terms in the future.
Cons of debt relief
- Results not guaranteed. Debt settlement and management aren’t guaranteed to work — you could end up in a worse situation and need to file for bankruptcy.
- Not legal in all states. Many states have laws prohibiting debt settlement, though credit counseling agencies are legal nationwide.
- Illegitimate lenders. In the states where it’s legal, there isn’t a lot of regulation governing the debt relief industry. If you’re not careful, you could end up working with a company that takes your money and doesn’t provide the services it promised.
How do I get started?
Once you’ve compared the different types of debt consolidation and debt relief you might be eligible for, you’re ready to sign up. If you’re applying for debt consolidation, compare lenders and credit card companies before filling out a quick online application.
With debt relief, you might have to do some research to make sure you’re working with a legit organization. However, you can find a government-approved credit counseling agency near you on the Department of Justice’s website.
Debt relief also typically involves filling out a quick online application, though you might have to meet with your local credit counseling agency in person before signing up for debt management.
Debt consolidation can help you pay off your loans and credit cards with potentially lower rates or longer terms, but it’s not great for high debt loads. Debt relief is a more dramatic step available to you if debt consolidation isn’t enough, though it could land you in a worse situation if you don’t complete the program.
Still not sure which is right for you? Check out our guides to get more details about debt consolidation and debt relief.
Frequently asked questions