What’s the Difference Between Debt Relief and Debt Consolidation?

If you’re currently unable to pay off your debt, you might have heard of the terms debt relief and debt consolidation. While they are both ways to reduce your debt problems, debt relief and debt consolidation differ in important ways. Read on to learn the differences between them so you can determine which one is best for your situation.

Main differences between debt relief and debt consolidation

What is debt relief?

The term debt relief normally refers to a process known as “debt settlement”. Debt settlement helps you get out of debt by negotiating with creditors in order to have them accept a payment that’s less than what you owe. Debt relief companies can help you through the process by acting as an intermediary between you and creditors to achieve this goal, although it is not the only option when choosing to undergo the debt settlement process.

While the term debt relief usually refers to a process that is aided by a third party known as a debt relief company, the debtor can also engage in the process by themselves. The do-it-yourself approach to debt relief is often tedious, as you have to make a detailed list of the debts you owe, contact your creditors directly to state your case and explain why you cannot make your payments and have a specific settlement offer ready.

Debt relief companies are designed to help you through the process and generally charge 15-25% of what the total sum of the settlement between you and your creditors is. Debt relief companies also have established relationships with the most common creditors which helps facilitate and quicken the pace of what can be a slow process.

What is debt consolidation?

Debt consolidation, on the other hand, is a repayment strategy in which you combine multiple debt balances into a single loan. This allows you to focus on only one payment and can reduce monthly installments by consolidating your debt into a single, more manageable interest rate. This can be achieved by applying for a debt consolidation loan or soliciting a new credit line that can pay off your old debts, allowing you to focus on a single payment.

You can consolidate your debt through a HELOC, or a home equity line of credit. This accesses the equity of your home and turns it into cash that you can use to settle your debt. This option can be appealing to homeowners with a lot of equity but bad credit or little liquidity. However, this loan does use your home as collateral and your rate will depend on factors like your lender, home value and credit history.

One way to consolidate your debt without the need for collateral is to request a personal loan. These are usually unsecured and thus do not need collateral but you do need at least a fair credit score to have them approved. Interest rates can vary wildly depending on your credit score, with rates usually starting around 9%.

Finally, another way you can consolidate your debt is through a balance transfer credit card. Borrowers who can pay off their debt within a credit card’s introductory period often face an interest rate of 0%. This can be appealing to someone who does not have home equity or a good credit score but debtors should make sure they can pay it off within the time limit or face the risk of an increasing interest rate, usually higher than that of a personal loan.

The main difference between debt relief and debt consolidation

While debt relief programs can help lessen the overall cost of your debt, debt consolidation helps you refocus your efforts into a single payment, hopefully lowering your interest rates and other debt stressors in the process. While both can help you pay less in your overall debt, one may be more suited for your needs than the other based on your financial situation.

Things to know about debt relief and debt consolidation

Now that we’ve learned what debt relief and debt consolidation programs entail and the main difference between them, you might be wondering which of the two is best for you and your current debt. Here are some things you need to know before deciding:

Not all debt qualifies for debt relief

You should know that only unsecured debt qualifies for debt relief. This means secured loans, which are loans that use collateral, cannot take advantage of debt relief programs. Examples of secured debt are those tied to mortgages, home equity loans and auto loans, while common examples of unsecured debt include credit card debt, medical debt and personal loans. If you have secured debt, debt consolidation or other types of solutions might be better suited for you.

Debt consolidation involves an upfront cost

Since debt consolidation involves combining your debt under a new loan, your new lender will charge an origination or transfer fee for consolidating your new credit line. This upfront cost can be difficult to pay for a person already in debt, and may not be convenient to everyone looking to resolve their debt. Also, debt consolidation does not always mean a lower interest rate, which, combined with a high origination fee, could make you end up in more debt.

There are other options

If you’re learning about debt relief and debt consolidation and are thinking that neither sound right for you, you should know that there are other options available to help you overcome your debt. One of those options is a debt management plan, which is a repayment program that is structured by nonprofit credit counseling agencies. Similar to a debt consolidation loan, a debt management plan consolidates your payments and can potentially reduce your interest rates.

Summing Up the Differences Between Debt Relief and Debt Consolidation

Debt relief programs work by reducing your overall debt owed to creditors, while debt consolidation loans combine your different sources of debt into a single payment that can potentially reduce your interest rates. Most debt relief programs cannot settle secured debt, while debt consolidation loans involve origination fees and don’t reduce overall debt. In the end, it is up to you to assess your financial needs and discuss your debt options with a professional before deciding if either option will help you with your debt.