Sep 15, 2023

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If you struggle to manage your debt, you might wonder if debt consolidation or debt settlement could help.

With debt consolidation, you pay off debt from several different creditors with a single loan. Depending on your personal financial situation, consolidation could help you save money on interest and may improve your credit health.

Debt settlement is when you negotiate an agreement with one or more creditors to pay less than the full amount you owe. People who have a hard time making their payments and want to avoid bankruptcy sometimes use this tactic.

It’s a good idea to understand the pros and cons of debt consolidation and debt settlement. That way if you ever need help taking control of your debt, you have a basic knowledge of some of your options. In this article we lay out the basics.

Table of contents

What are the benefits of debt consolidation?

When you consolidate higher-interest debt with one lower-rate personal loan, you can simplify your financial picture with one set regular monthly payment. You might also be able to save money on interest and pay off your debt faster.

Simplify your finances

If you owe money to multiple creditors, you might find it difficult to manage all those balances—each with its own interest rate, minimum payment, and payment due date. In addition, if any of that debt has variable interest rates, your monthly payments can fluctuate. That makes your financial picture even more complex.

When you consolidate several balances into one fixed-rate personal loan you get a single due date and one set regular monthly payment. You can build this payment into your budget and circle the day on the calendar when your debt will be paid off.

This may simplify your finances and make it easier to budget. In fact, 87% of surveyed debt consolidation customers told us their Discover® personal loan was simpler than their other financial options.*

Save money and time

With debt consolidation, you will need to eventually pay off the full amount you’ve borrowed. This is an important difference between consolidation and settlement.

But a debt consolidation loan could help you save money on interest. Use our debt consolidation calculator to estimate your potential savings.

A personal loan could also help you pay down debt faster. 89% of surveyed customers who took out a Discover personal loan to pay off existing debt told us they paid it off sooner, with the majority of them reporting they paid it off an average of 2 years earlier.*

With your debt paid down, you’ll be able to focus on your longer-term financial goals.

What are the disadvantages of debt consolidation?

Some potential drawbacks to debt consolidation include:


Some lenders charge fees, such as origination fees, closing costs, prepayment penalties, or late fees. Discover Personal Loans does not charge fees as long as you pay on time.

It doesn’t change your habits

Consolidating debt won’t keep you from taking on more debt than you can handle in the future. The best way to stay on track financially is to develop good money habits like sticking to a budget and prioritizing savings.

You might pay more in interest

In general, debt consolidation may be a great way to save money on interest. That’s because you might qualify for an interest rate on a personal loan that is lower than what you’re currently paying on your debt, especially if you have credit card debt.

The length of your repayment term matters when you’re considering interest on the life of your loan. For example, choosing a longer term for the loan could lower your monthly payments. But it might cost you more in total interest in the long run.

How does debt settlement work?

Debt settlement can be used to settle one large debt or several smaller balances. If you are able to negotiate a settlement with your creditors, you might be able to reduce your overall debt, avoid filing for bankruptcy, or pay off your debt sooner.

While you may be able to negotiate directly, some people may benefit from working with a professional, either a debt settlement consultant or an accredited debt counselor. It all depends on your personal situation.

Drawbacks of debt settlement

There are several potential drawbacks to debt settlement that you need to think about:

It might not be an option

Your creditor is under no obligation to settle the debt for less than what you owe and may simply refuse.

Your bills will keep coming

While you’re negotiating or paying on a settlement, your bills will continue to come. That means your debt can grow as interest adds up.

It may hurt your credit score

This could happen as a result of missed payments or from the settlement process itself. These issues can stay on your credit report for up to seven years and may make it difficult for you to borrow money.

You might have to pay all at once

In exchange for settling for a reduced amount owed, you might need to pay your creditors in one lump sum. This amount could be much more than your original monthly payment or your monthly payment after debt consolidation. There may also be tax implications that add costs.

You might need professional advice

If you are really struggling with debt and worrying about bankruptcy, it could make sense to consider debt settlement. But because there are so many risks involved, you may want to talk with a tax professional or financial advisor—even if you don’t work with a debt counselor. You will want to be sure you really understand the details and what they mean for you and your financial goals.

Debt consolidation vs. debt settlement: Which one is better?

As with all financial decisions, your specific situation will determine which option is better for you. Be sure to consider these key things while you weigh the pros and cons of debt consolidation and debt settlement:

  • You might pay less overall with debt settlement, but you will still need to pay the negotiated debt over time or in a lump sum. Make sure that doing either will not cause you more financial problems.
  • It might make sense to use a reputable debt settlement company to help you with debt settlement, which could mean additional fees.
  • Debt settlement could make it harder to borrow money in the future.
  • With debt consolidation, you pay one creditor instead of several. You still pay off the original amount you owed, but you can do it over time with one set regular monthly payment that fits in your budget.
  • Debt consolidation could save you money in interest if you consolidate several higher-interest balances into one lower fixed-rate personal loan.
  • In the end, whether you choose debt consolidation or debt settlement will depend on your financial situation.

Want to see how much you could save on interest with a debt consolidation loan?

Calculate Your Debt Consolidation Savings

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.


All figures are from an online customer survey conducted August 19 to September 6, 2022. A total of 665 Discover personal loan debt consolidation customers were interviewed about their most recent Discover personal loan. All results @ a 95% confidence level. Respondents opened their personal loan between January and June 2022 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.