Compare the options
Debt relief vs debt consolidation
The Consumer Financial Protection Bureau describes debt relief companies as firms that say they can renegotiate, settle, or change the terms of a debt, usually for a fee. Debt consolidation is a new loan you repay over time so several debts become one payment. The two are not the same, and neither guarantees a lower total cost.
Side by side
How debt relief and debt consolidation compare
The rows below follow the CFPB's debt relief page, its comparison of settlement and consolidation, its consolidation guide, and the FTC's guide to getting out of debt. This is general consumer information, not a loan offer.
| Topic | Debt relief | Debt consolidation |
|---|---|---|
| What each is | Companies, also called debt settlement or debt adjusting companies, that say they can renegotiate, settle, or change the terms of a debt you owe a creditor or collector. | A new loan you use to repay separate debts, then pay back as one amount over time. |
| How it works | The company tries to get creditors to accept less than you owe, often a lump sum you save up. Creditors do not have to agree, and the company cannot erase every debt. | You borrow, that money pays the separate debts, and you repay the new loan on a schedule. It can simplify how many payments you make. It does not automatically reduce what you owe. |
| Credit impact | Can be negative. These services can hurt credit scores. Companies typically tell you to stop paying credit cards, which usually adds late fees, penalty interest, and other charges, and can bring collection. | A soft-pull prequalification on this site has no impact to your credit score. A later full application may require a hard credit inquiry, which could affect your score. |
| Who it suits | The CFPB says to consider a nonprofit credit counselor, or negotiating with the creditor yourself, before you agree to a debt settlement company. Dealing with these companies can be risky. | The CFPB says this loan simplifies how many payments you make. Compare the full cost, including fees and how long you would repay. It probably will not help if you keep spending more than you earn, unless spending or income changes. |
| Costs and fees | Companies often charge expensive fees, and a dedicated account may have its own fee. A settlement company cannot collect its fee before it settles a debt. Forgiven debt can be taxable income. | A smaller monthly payment can come from a longer repayment period. With fees included, you might pay more overall than if you kept your current payments. This site does not guarantee a lower total cost. |
Debt relief
What debt relief is, and the risks
The Consumer Financial Protection Bureau says debt relief or settlement companies are companies that say they can renegotiate, settle, or in some way change the terms of a person's debt. Debt settlement companies, also sometimes called debt relief or debt adjusting companies, often claim they can negotiate with creditors to reduce the amount you owe. The FTC describes these programs as typically offered by for-profit companies. They negotiate a lump sum that is less than what you owe, while you set money aside in a designated account. They often encourage you to stop paying creditors.
Creditors do not have to agree. The CFPB says many lenders do not negotiate with debt settlement companies, the companies usually cannot get better terms than you could get yourself, and they cannot erase all of your debts. They also cannot guarantee how much you might save or how long the process takes.
Fees are part of the risk. The CFPB says these companies often charge expensive fees, and you might be charged a fee for a dedicated bank account managed by a third party. The FTC says a debt settlement company cannot collect its fee before it settles your debt. Only scammers collect fees before they settle any of your debts.
Credit can be damaged. The CFPB says using debt settlement services can have a negative impact on your credit scores and your ability to get credit in the future. If you stop paying credit card bills, you will usually incur late fees, penalty interest, and other charges, and creditors will likely step up collection. Working with a debt settlement company may lead to a debt collection lawsuit. The FTC adds that your credit report and credit score are likely to be damaged, and that you could be sued while you wait.
Forgiven debt can have a tax consequence. The CFPB says that if a creditor forgives a portion of your debt, it could be counted as taxable income on your federal income taxes, and that you may want to consult a tax advisor. The FTC says any savings from debt relief services could be considered income and taxable.
Some offers are scams, or are settlement dressed up as consolidation. The CFPB says many companies that advertise consolidation may actually be debt settlement companies, which often charge up-front fees and may tell you to stop paying and move money into a special account. The CFPB says to avoid a company that charges any fees before it settles your debts, represents that it can settle all of your debt for a promised percentage reduction, touts a new government program to bail out personal credit card debt, guarantees it can make your debt go away, tells you to stop communicating with your creditors, or tells you it can stop all debt collection calls and lawsuits. The FTC says only scammers guarantee to settle all of your debts, guarantee fast loan forgiveness, or guarantee results from a government debt relief program.
Debt consolidation
What a consolidation loan does instead
The CFPB describes a debt consolidation loan as money you borrow to repay separate debts, then pay back as one amount over time. That simplifies the number of payments. The FTC describes the same idea: one loan, one monthly payment. You still repay the new loan. It does not automatically reduce what you owe, and it does not guarantee a lower total cost.
A lower monthly payment may exist only because repayment lasts longer. The CFPB's consolidation guide says that once fees and the longer term are included, you might pay more overall than if you kept your current payments. The same guide says a consolidation loan probably will not help you get out of debt if you keep spending more than you earn, unless you reduce spending or increase income. The FTC says most consolidation loans have costs, so compare the full cost before you agree.
Credit impact depends on the step. Prequalification on this site uses a soft credit inquiry. The CFPB says soft inquiries do not affect your credit scores, and this site states that this step has no impact to your credit score. It is not a loan approval. If you choose to proceed, a hard credit inquiry may be required and could impact your credit score. The same CFPB page says hard inquiries, the checks lenders often run after you apply, will impact your credit score.
If you want to look at that first step, start with debt consolidation prequalification. For when one payment may fit your budget and when it may not, read is debt consolidation a good idea.
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Common questions
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