Debt Consolidation vs. Debt Restructuring: What’s the Difference?

Debt Consolidation vs. Debt Restructuring

Debt consolidation and debt restructuring share the same goal: to help make your debt more manageable through more favorable loan terms. But that's about the only real similarity between the two.

With a debt consolidation loan, for instance, you're applying for new credit to pay off one or more existing debts. In contrast, debt restructuring involves reaching out to your lender and requesting an adjustment to your loan terms.

Debt consolidation can be helpful if you have good credit and you're looking to save money on interest or pay down your debt faster. On the other hand, debt restructuring may be a last resort before pursuing more drastic measures, such as debt settlement or bankruptcy.

What Is Debt Consolidation?

Debt consolidation is a process in which you pay off one or more loans or credit cards using a new loan or credit card. Personal debt consolidation loans and balance transfer credit cards are two of the most commonly used debt consolidation tools.

To consolidate debt, you'll gather information about the loans or credit cards you want to pay off, including balances and interest rates. Then, you'll shop around and compare debt consolidation loans and balance transfer credit cards to see if you can find one with a better interest rate, better repayment terms or other terms that can help you better manage your debt.

Once approved, you can use your loan proceeds to pay off the debt or request a balance transfer from your new credit card issuer. Then, you'll start making payments on the new debt.

Pros and Cons of Debt Consolidation

What Is Debt Restructuring?

Debt restructuring is the process of negotiating with your lender to adjust the terms of a single loan or credit card, making it easier for you to repay your debt. Restructuring a debt may result in a reduced interest rate, a lower monthly payment, cutting the principal balance of the loan or bringing a past-due account back into current status.

If you're considering restructuring, contact your lender and explain your situation. If your lender agrees to help, discuss your options and negotiate a solution that works for both parties.

Pros and Cons of Debt Restructuring

How to Choose the Right Option

Debt consolidation and debt restructuring are effective ways to tackle debt, but the right one for you depends on your situation. Before you pursue one or the other, it's important to evaluate your loan terms, credit score, budget and financial goals—and learn about other debt payoff options (more below).

To help you decide, here are some scenarios where it may make sense to choose one or the other.

Debt consolidation may be right for you if:

• You're keeping up with your monthly payments.
• Your credit score has improved since you first took out the debt.
• You can qualify for a balance transfer credit card or low-interest personal loan.
• Your top priority is to save on interest charges or pay down your debt faster.
• You can comfortably afford the new monthly payment.

Debt restructuring may be right for you if:

• You're behind on debt payments.
• Your income recently dropped, and you're worried about missing payments.
• Your credit score is in poor shape.
• You're at risk of defaulting on your debt.
• You want to avoid more drastic actions, such as debt settlement or bankruptcy.

Other Ways to Get Out of Debt

Depending on your situation, it may make sense to consider other avenues for handling your debt. Here are a handful of alternatives to consider:

• Debt snowball method: The debt snowball method focuses on paying off debts from smallest to largest. You'll make minimum payments on all debts and direct extra funds toward the smallest balance. Once it's paid off, you'll roll that payment into the next smallest debt, repeating until all debts are eliminated.
• Debt avalanche method: The debt avalanche method works similarly to the snowball approach. The only difference is that you'll target your debts with the highest interest rates first.
• Debt management plan: A debt management plan (DMP) is a repayment plan administered by a credit counseling agency. Through a DMP, you may be able to get a lower interest rate and reduced monthly payment, among other things. You'll make one payment to the agency, which will distribute the money to your creditors.
• Debt settlement: If you're behind on payments, you may consider trying to negotiate with your creditor to pay less than what you owe. Debt settlement can be particularly worth considering if the creditor has filed a lawsuit against you, but it can seriously damage your credit.
• Bankruptcy: Bankruptcy can help you eliminate certain debts through the legal system. That said, bankruptcy can be devastating financially, and it can damage your credit for years, so it's important to consider it only as a last resort.

The Bottom Line

Managing debt can be tricky, especially if your financial situation is complicated. As you consider debt consolidation and debt restructuring, it's important to think about your situation and the advantages and disadvantages of each option to determine which is right for you.

Regardless of which one you choose—or if you choose another option altogether—it's important to keep an eye on your credit score throughout the process and afterward. With Experian's free credit monitoring service, you'll get access to your FICO^® Score^☉ and Experian credit report. You can use these resources to track your credit health and identify steps you can take to build and maintain a good credit history.

While working to build credit can take time and may not help your current situation, it can set you up for better credit terms in the future.