Debt Relief Programs vs. Debt Consolidation Loans — What You Need to Know

Debt relief programs and debt consolidation loans are common financial tools used by individuals to pay off credit card debt, but they work very differently. Which option is right is based on each person's overall financial history, how much debt they are carrying and whether they are experiencing significant financial hardship.

In broad strokes, debt relief programs involve working with experienced negotiators who contact creditors to settle a debt for less than what is owed (which is why you will also hear this solution referred to as "debt negotiation", "debt settlement", "debt resolution", or "credit card modification"). Debt consolidation loans are simply personal loans that an individual uses to pay off outstanding credit card debts, exchanging several monthly payments to the creditor for a single monthly payment to the lender. The debt owed remains the same, but the amount of interest paid will often decrease, as loan interest rates will often be lower than credit card rates.

When used properly, either option can help an individual save money and get out of debt faster than paying off credit cards on their own. Below, we take a closer look at each, and detail their pros and cons.

What is a Debt Relief Program?

Joining a debt relief program is a method of reducing and paying off debt when an individual is struggling to manage the debt they are carrying and does not have the income to reasonably pay it off.

Who is it for?

Anyone who lacks sufficient income to pay off their debts and faces financial hardship, such as divorce, unemployment, or a medical emergency and expenses. Debt relief programs are also a good option for individuals who want to avoid bankruptcy.

How does it work?

When you join a debt relief program, you partner with a professional team that negotiates directly with creditors to reduce your total debt owed; savings range from 30 to 80 percent of the amount owed. Instead of paying creditors each month, you contribute money to an FDIC-insured program savings account to begin the process of accruing funds to pay settlements to your creditors.

How long does it take?

Debt relief programs vary in length, depending on your total debt (and what you can afford to pay monthly), but in general, you can expect to see all your enrolled debts settled within a 2- to 4-year timeframe. It's important to note that it typically takes between seven and nine months before you have accrued enough savings to settle your first debt, sometimes longer, depending on the size of your debts.

What will you pay each month?

Your monthly fee will vary, based on your debts, your income and the program you join.

What fees are involved?

Every debt relief plan has a different fee structure.

What are the cons?

  • Typically, you must stop all payments to your creditors, and stopping payments can often impact your credit score. Typically, a debt must be delinquent for 3 to 6 months before creditors will negotiate, and you may accrue additional late fees.
  • A creditor may choose to sue you. You should consult a legal professional for advice on how best to handle this situation.
  • Taxes may be incurred on any debt written off.


In a debt relief program, you can move yourself out of an extremely difficult financial circumstance and eliminate a percentage of your debt. You'll pay less money in a shorter amount of time than with a debt consolidation loan.

To learn more about debt relief and options available for you, contact a Strategic Consulting representative today. Call 855-906-3235 for your free consultation.

What is a Debt Consolidation Loan?

A debt consolidation loan is simply a personal loan used to pay off outstanding debts. Its main benefit is streamlining many debts into a single payment and potentially reducing your interest rate (and therefore total interest paid) over multiple high-interest-rate credit cards.

Depending on the lender, debt consolidation loan funds will either: (1) be paid directly to the borrower, and they are responsible for paying off the debt; or (2) the lender will send the funds to the identified creditors. In some instances, when option (2) is available and chosen, the borrower may be able to qualify for a lower interest rate because the lender will consider the debts to be paid off in the borrower's debt-to-income (DTI) calculation.

The value of securing a debt consolidation loan to pay off credit card and other debts (medical bills, for example) is to pay off high-interest debt in exchange for a known, consistent interest rate that will not change. However, consumers with fair to poor credit will find it difficult to get a competitive rate on a debt consolidation loan.

Who is it for?

Debt consolidation loans are for individuals who want to simplify their debt, by replacing multiple payments to multiple creditors with one single payment to a lender. Loans are a good option for those who have a high enough income and credit score, and a low enough debt-to-income ratio that they can qualify for favorable interest rates and terms.

How does it work?

The funds from the loan are used to pay off the outstanding debts; the individual pays off the loan instead.

How long does it take?

The term/length of the loan is determined by the lender working with the individual. Terms vary by lender, but loans are typically offered in 12- to 72-month terms.

What will you pay each month?

The monthly payment will be determined by the loan terms: how much is being borrowed, for how long, at what interest rate. The individual will end up paying the full balance of any debt owed plus interest and fees, but they will know exactly when they will be out of debt.

The loan terms will determine the monthly payment: how much is being borrowed, for how long, and at what interest rate. The individual will end up paying the balance of any debt owed plus interest and fees, but they will know precisely when they will be out of debt.

Lenders do not require excellent credit, but those with lower credit scores will pay higher interest rates. Consumers with credit scores below 639 could pay as much as 36 percent in interest.

What fees do lenders charge?

Loan origination fees range between 1 and 10 percent of the total loan value.

What are the cons?

  • Generally, a higher monthly payment than the monthly minimums you currently pay on your credit cards.
  • Not a one-size-fits-all solution, as loan interest rates can be very high for individuals with low income or damaged credit.
  • There is no reduction in your overall debt; you will pay all debt and interest in full.


If you are able to qualify for a debt consolidation loan, you can simplify your debt by using the loan to pay off all of your outstanding credit card debt, exchanging multiple high-interest payments for a single payment at a lower interest rate. However, your loan interest rate depends on your current credit score, income, and debt-to-income ratio, and you also generally need to be able to afford a higher monthly payment than your card minimums. You will know exactly how much you owe each month, and that amount will not vary, and you will be out of debt at the end of the loan term.