Debt Resolution vs. Debt Consolidation

Debt resolution plans (DRP) and debt consolidation loans can each make a huge difference if you’re looking for debt relief, but they’re very different products. So, what is the difference between debt resolution and debt consolidation? Explore how they stack up and which is best for you.

How does a debt resolution plan work?

A debt resolution plan, also known as a debt resolution program, is essentially a non-profit spin on debt settlement:

  1. Begin by working with a debt counselor to create a plan and make sure it’s right for you
  2. Start making monthly payments to the plan administrator
  3. While funds are being collected, your debt counselor will begin negotiating with your creditors for a partial repayment (sometimes as low as 50% of the original balance)
  4. Once these settlement agreements are reached, the plan administrator will begin using the accumulated funds to repay your creditors
  5. After every account is settled, your plan is closed and you are debt-free

Who’s it best for?

Debt resolution is best for consumers who are already delinquent on their debt payments, or are about to become delinquent, and can’t repay their debts in full under their current terms.

How does a consolidation loan work?

A debt consolidation loan allows users to combine multiple debts into a single payment, ideally with a more favorable interest rate.

  1. Apply for a consolidation loan with your bank, credit union, or financial institution of choice
  2. If you qualify and are approved, you’ll receive the funds for the loan
  3. Use those funds to repay (and potentially close) your other accounts
  4. Continue making monthly payments on your new consolidation loan until the loan is repaid in full

Who’s it best for?

Consolidation loans work best when you have good credit and qualify for favorable terms. They can also be a good fit if you have multiple debts with high interest rates and struggle balancing all of those payments.

Comparison of Debt Resolution vs. Consolidation

Debt types covered

  • Debt resolution plan: Credit card debt, personal loans, medical debt, collection debt
  • Consolidation loan: Credit card debt, personal loans, medical debt, collection debt

Length of time

  • Debt resolution plan: 24-48 months
  • Consolidation loan: 12-120 months

Interest rate

  • Debt resolution plan: No interest charges
  • Consolidation loan: 6% to 36% depending on creditworthiness

Fees

  • Debt resolution plan: In most states, MMI’s fee is 15% of the original balance collected incrementally as each account is settled. You may be charged a $15 fee if payments are returned for insufficient funds.
  • Consolidation loan: Depending on the lender, you may be charged an origination fee (1%-8% of the loan amount); interest charges; and late payment fees ($15-$40).

Consequences for missing a payment

  • Debt resolution plan: No consequence for missing a single payment; plan may be cancelled after missing multiple payments.
  • Consolidation loan: Delinquency reported to credit bureaus, late fees charged; loan will default after missing multiple payments.

Credit requirements

  • Debt resolution plan: No credit requirement
  • Consolidation loan: 700 or higher is recommended for best terms; 620 or below may only be possible with a higher interest rate

Credit score impact

  • Debt resolution plan: Missing payments and settling for less than what’s owed are bad for your credit, though you may be able to recover quickly once the debt is paid off.
  • Consolidation loan: Credit score may dip immediately after opening a new loan, but timely payments and paying debt in full are very positive for your score.

Potential savings

  • Debt resolution plan: You may be able to settle for as little as 50% of your original balance, plus fees.
  • Consolidation loan: Repay debts in full, but savings could be substantial if you consolidate high interest rate accounts into a low interest rate loan.

Conclusion

Debt consolidation loans are a great option when you have a lot of debt, but you’re not in panic mode yet. Your credit is still in good shape and you’re able to make payments each month, you just wish you had fewer payments and a better interest rate.

For consumers who are struggling a bit more and may not be able to afford a full repayment of their loan, particularly those who are already behind in their payments and aren’t likely to get back on track any time soon, a debt resolution plan may make more sense.

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