You have many choices when dealing with debt. Two popular options are debt consolidation and debt restructuring. Understanding each of these can help you make good decisions about your money.
Let’s explore the key differences between debt consolidation and debt restructuring.
Debt Consolidation
Debt consolidation turns many debts into one debt. This lowers the stress of making many payments each month. Hopefully, it also lowers the amount you pay on your debt, both now and in total. This can happen with a lower interest rate or better repayment terms. Sometimes, it can be both.
There are different types of debt consolidation. They all do the same thing: simplify and lower your debt—but they do it in different ways. The most common types are:
- Debt consolidation loans
- Balance transfer credit cards
- Debt settlement
Debt Consolidation Loans
Debt consolidation loans are likely what you think of when you think of debt consolidation. With this method, you take out a loan that’s big enough to pay off all your other debts and use the money to pay off those debts. Then, you make regular payments to pay down the new loan.
Ideally, a debt consolidation loan does a few things. It should make your monthly payments easier to manage. In the best case, it also gives you a lower interest rate and better terms than the original debt. If so, your monthly payments should go down.
Many lenders offer debt consolidation loans. This includes banks and credit unions. Before choosing a lender, compare interest rates, fees, and repayment terms. Make sure you’re getting the best deal.
Balance-Transfer Credit Cards
Using balance-transfer credit cards might seem strange. Many people got into debt by overspending on credit cards. So, why get out of debt by opening a new card?
The truth is that a balance-transfer card can help you consolidate debt and save money on interest. You just have to use it the right way.
With this option, you apply for a new card. It should have a high credit limit and a lower interest rate than your current cards. It’s best to get a card with a 0% introductory APR. This lets you avoid interest for a set time, usually 6 to 21 months.
Then, you move all your debts to this new card. Pay it off as much as you can before the card starts charging interest. Since the debt isn’t building interest, every dollar you pay reduces the balance. This can help you pay off your debt faster.
Debt Settlement
Debt settlement involves negotiating with creditors to pay less than you owe. It’s different from other types of consolidation that focus on changing or moving debt. Instead, debt settlement aims to reduce your overall debt.
With debt settlement, you may choose to work with a debt settlement company. This company negotiates with your creditors for you. You then pay into an account managed by the company instead of paying your creditors directly. One benefit of this is that now you’re only making one debt payment.
After a while, you should have a lot of money in the account. Then, the debt relief company will ask your creditors to accept a lump-sum payment and forgive the rest of your debt. This offer helps the creditor get some of the money—which is better for them than getting nothing.
You might be surprised by how many creditors agree to this. The downside is that debt settlement can hurt your credit score.
Debt Restructuring
Debt restructuring can do many of the same things as debt consolidation, which is why many people confuse them. Both strategies try to improve your finances by changing the terms of your debt.
Like debt consolidation, debt restructuring can sometimes get you:
- Better terms on your debt
- Better interest rates
- A clearer path to becoming debt-free
With debt restructuring, you renegotiate the terms of one debt with your lender. By restructuring the debt, you make it easier to pay off. This might involve lowering the interest rate or extending the repayment time. It might even reduce the amount you owe.
Lenders agree to debt restructuring when there aren’t many other options. This happens when you might default on the loan. For example, you might be close to bankruptcy. The lender knows that it might not get any more payments unless it restructures the debt.
Debt restructuring often helps both sides. You get a better repayment plan, and the lender has a better chance of getting some of the money you owe.
Debt restructuring can happen in bankruptcy. During bankruptcy, debt restructuring helps you manage your finances. It also helps you pay back creditors over time.
What’s the Difference Between Debt Consolidation and Debt Restructuring?
Now that we know what debt consolidation and debt restructuring are, let’s compare them. We’ll also look at how they apply to different financial situations.
Many Debts vs. a Single debt
One of the biggest differences between debt consolidation and debt restructuring is the scope of the debt they address. Debt consolidation focuses on many debts at once. It tries to make the debts easier to manage by combining them into one debt.
Debt restructuring usually focuses on one debt at a time. However, there are some situations where you could restructure many debts at once. This is especially true during bankruptcy.
Debt consolidation usually makes the most sense when dealing with many smaller debts. These debts could be credit card debt, personal loans, or medical bills.
Restructuring makes more sense when dealing with single, larger debts. These debts could be a mortgage, a business loan, or a tax debt.
A Simple Financial Move vs. a Negotiation
While it does help to work with a professional, you can often do debt consolidation on your own. You can find a good debt consolidation loan or balance-transfer credit card. Then, you can pay off your debts on your own.
Debt restructuring is a negotiation between you and your creditors. You can’t just decide to restructure your debt. Your creditors need to agree to the new terms. This negotiation can be hard and will probably require good communication skills.
Your creditors will likely only restructure your debt if you’re in such bad shape that you’re at risk of defaulting. Otherwise, they’ll probably try to make you stick to the original terms.
Pros and Cons of Debt Consolidation
Debt consolidation can lower your stress levels and make your payments smaller. It can also give you a clearer path to becoming debt-free. These benefits can improve your overall financial well-being.
But, debt consolidation also has downsides. It doesn’t fix the problems that led to the debt in the first place. If you start running up debts again, you can get stuck in a bad cycle. You might end up worse off than before if you don’t fix your spending habits.
Pros and Cons of Debt Restructuring
Debt restructuring can lower your interest rate and the amount of debt you owe. This provides financial relief. Your payments might also be combined into one payment each month, which makes your budget easier and reduces the risk of missed payments.
However, debt restructuring often means you’re having severe financial problems. Restructuring through bankruptcy hurts your credit score, which can make it hard to get credit in the future. Also, you might have to pay income taxes on the amount of debt that is forgiven. Finally, not all debt can be restructured.
Conclusion
Debt consolidation and debt restructuring both help with debt, but they work in different ways. Debt consolidation combines multiple debts into one. It makes payments easier and possibly lowers interest. Debt restructuring changes the terms of a single debt to make it more manageable.
The best option depends on your situation. No matter which you choose, good money habits—like budgeting and avoiding new debt—will help you stay on track.
Need help figuring out the best solution for your debt? National Debt Relief specializes in helping people become debt-free. Get a free debt assessment today to start your journey toward a better financial future!
