Debt Consolidation vs Debt Settlement: What’s the Difference?

The Monetary Authority of Singapore aims to minimise debt accumulation and speed up economic recovery through tailored support measures for each borrower’s circumstances. It extends loan repayment relief measures for borrowers that still experience cash-flow difficulties due to COVID-19.

The MAS announcement extends the application window from June 30 to September 30 for mortgage repayment plan reduction, term loan interest rate reduction, and renovation and student loan tenure extension. It also mentions up to five years loan tenure extensions for debt consolidation plans.

These are ideal financial strategies for individuals and SMBs that have been affected by the COVID-19 situation. Before jumping into a debt consolidation plan, however, determine whether it’s suitable for your circumstances. Otherwise, debt settlement might be a more appropriate option.

Capitals Funds Investments differentiates debt settlement and debt consolidation in Singapore, helping you make informed financial decisions to minimise your debt accumulation.

What’s the difference between debt consolidation and settlement?

We can summarise the main difference between debt consolidation and debt settlement in one statement — debt consolidation reduces the number of creditors you owe while debt settlement reduces your debt.

Keep in mind that debt settlement doesn’t fully get rid of your total debt owed. Rather, you can negotiate with your creditors to lower the total amount for a lump sum payment. Once you reach an agreement, it automatically eliminates your debts without having to pay in full.

Debt settlement is a good alternative to bankruptcy, especially if you’re considering filing for bankruptcy as a last resort. You will need cash to negotiate and pay for the settlement, though. If you don’t have liquid assets, debt consolidation might be a better option.

Debt consolidation lets you roll multiple loans into a single loan. This lets you pay for everything at a uniform monthly interest rate. It relieves the stress of monitoring and managing multiple debt payments. It could also lower your total monthly debt payments or monthly interest rate.

A debt consolidation plan could also boost your credit score. It improves your financial management skills because you only have to meet one monthly payment deadline. There’s a lower chance of overlooking deadlines and missing monthly payments. This reflects on your credit history.

Which financial strategy is more suitable for your situation?

Debt settlement might take a greater load off your shoulder if your next best step is filing for bankruptcy. You would pay less than what you owe and instantly get rid of the financial burden. Not all creditors would agree to it, though. Late payment history for a settled account could also harm your credit rating.

Debt consolidation is a more attractive option if you feel like you’re paying too much interest for existing debts or if you’re unable to pay all monthly dues in full. It’s convenient for people who lose track of monthly payments, too. The recent loan tenure extension from the MAS also makes it more appealing.

Ultimately, the choice depends on your financial circumstances. If you think debt consolidation is more suitable for your situation, talk to one of our representatives about it: (65) 6281 7736.