Debt Consolidation vs. Debt Management vs. Debt Settlement: Do You Know the Difference?

Even just the thought of dealing with financial matters often makes people want to hide. Add the word 'debt' to the discussion and people disappear.

Outlining some simple definitions should help ease the intimidation and enable those facing debt and its potential consequences to get a handle on their financial standing.

understand the differences in debt management

Debt Consolidation

Consolidating your debt is exactly what it sounds like – bringing together all debts under one umbrella, so to speak, “consolidating” them and giving you one bill to pay each month. This is accomplished through debt refinancing, where you take on one bigger loan to pay off all the other smaller debts.

One of the top agencies for debt consolidation, Prosper, uses private investors to do so, but more common are traditional lending institutions like banks or credit unions, In exchange for the loan, you will likely need collateral, often in the form of a mortgage or home equity loan – so pay off the consolidated debt according to schedule.

Beyond the peace of mind of knowing that you no longer owe many parties, advantages of debt consolidation include the potential of locking in a low or lower interest rate and streamlined fee structures. These features not only protect your nerves, but also save you money.


Debt Management

Managing your debt might be the most mature way to handle a debt crisis: you and the institutions you owe arrive at a formal agreement that determines the terms of your payments. Ideally, debt management helps you take charge of your finances, so it's not for the very faint of heart. It is likely to your advantage, however, because establishing a plan with your creditors means that you have say in establishing what repayment terms work best for you.

Possible ways of improving your terms are as follows:

  • Extend the length of the loan for reduced monthly payments
  • Negotiate a reduced interest rate
  • Reduce the overall debt, when possible

You may find assistance in your attempts to manage your debt through agencies that negotiate on your behalf. These agencies range from non-profits that charge low or no fees to money-making endeavors with high fees. Needless to say, if you choose the route of debt management, find an agency that will help you for little or no charge.

Interested in debt relief? See our recommended programs.

debt management

Debt Settlement

Debt settlement is an arrangement between you and your creditor to reduce what must be paid to be considered “paid in full.” That new reduced balance can often be spread over a series of payments. The willingness of lending institutions to allow for debt settlement is counter-intuitive: after all, they lose out on money that they are owed. Creditors find incentive, however, through the skillful negotiations of top notch debt settlement companies like National Debt Relief, which may include advising you to stop all payments until an arrangement is achieved.


If you're committed to life free of debt, it requires changes in your spending behavior: Learn how a budget can help fix debt problems.

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