Some people may be confused about the difference between debt consolidation and debt settlement. These two are not the same and should not be confused. Therefore, this page will explain the basic differences.

Debt consolidation is when you take all of your different debt, including loans and credit cards, and transfer the balances to one loan. The benefit to doing this is having all of your debt in one place. The down side to the reduced payment is having to pay on it for a longer period of time. The longer the loan, the more you will end up paying.

For example, if you have five credit cards all with different balances, a student loan, and a personal loan, that would mean you are making seven different payments each month. If you consolidated them, you would pay off all seven of those smaller debts and bring them all together under one master loan and only pay on the one loan every month.

Debt Settlement is when you or a debt settlement company work with your creditors to erase part of your debt completely. For example, you owe one credit card company $8000. If you are unable to pay this, rather than not paying at all and completely defaulting on the balance, the credit card company may reduce your debt by a certain percentage so that they can recoup some of the money.

Each debt option has it's pros and cons:

1. You can use a debt consolidation company; however, these companies charge high fees and often do more damage to your credit score because they take your money and withhold it from the credit card companies to make them re-negotiate your debt. Unfortunately, every time they miss a payment for you, your credit score takes a hit.http://moneycentral.msn.com/content/Savinganddebt/Managedebt/P36230.asp If you would like to use a debt consolidation company, look for a reputable one that offers budget and counseling sessions.http://www.militarymoney.com/credit/1140111471
2. Debt Settlement may be an option for people who are unable to secure financing in order to consolidate various loans. However, there are negative repercussions for doing this. First, your credit score will take a hit similar to filing for bankruptcy. Second, negotiating this can take a long time, with hits to your credit score each time you miss a payment. Third, it will usually only work if you can provide the credit company a large lump sum payment in return for eliminating the rest of the debt.

The content on this page is not a substitute for professional legal advice. Please consult a lawyer before taking any action suggested on this page.