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

Quick Answer

Debt consolidation involves using another loan or credit card to pay off one or more balances, while debt restructuring entails working with your creditor to negotiate new terms on your loan or credit card.

Debt Consolidation vs. Debt Restructuring: What's the Difference? article image.

Debt consolidation and debt restructuring are strategies you can utilize to manage your debt. However, the two are very different in their approaches and results. Depending on your situation, one may be a better fit than the other.

Here's what you need to know about how debt consolidation and debt restructuring work and how to decide between them if you're concerned about high debt balances.

What Is Debt Consolidation?

Debt consolidation is a process in which you pay off one or multiple 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 consolidation loans and 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

Pros of Debt Consolidation

  • Potentially save money: If you can qualify for a debt consolidation loan with a lower interest rate or a balance transfer card with an introductory 0% APR promotion, you could potentially save hundreds of dollars on interest charges.
  • Simpler payments: Instead of having multiple monthly payments to track, you can consolidate all of your debts into one new monthly payment.
  • More structure: If you consolidate credit card debt with a consolidation loan, you can trade in your minimum monthly payments and no set repayment plan for a structured repayment plan with a fixed monthly payment.

Cons of Debt Consolidation

  • Generally requires good credit: You typically need to have good credit to get approved for a balance transfer credit card or for a consolidation loan with a reasonable interest rate.
  • Potential upfront costs: Many personal loans come with an upfront origination fee, which can be as much as 10% of the loan amount—though some lenders don't charge a fee at all. Balance transfer credit cards also typically charge an upfront fee of 3% to 5% of the transferred amount, and options to avoid it are rare.
  • Could be overwhelming: If you consolidate credit card debt with a personal loan, the new monthly payment could be more expensive, making it harder to keep up.

What Is Debt Restructuring?

Debt restructuring involves you negotiating with your lender to adjust the terms of a single loan or credit card, making it easier for you to pay it back. 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

Pros of Debt Restructuring

  • Can provide relief: Financial difficulties can create significant stress, and if you can negotiate a good solution, it can allow you to stay current on payments without breaking your budget.
  • Doesn't require good credit: You don't need to meet any credit requirements to obtain relief from your lender. Terms are usually based on your situation and the lender's policies for dealing with hardship.
  • Helps avoid default: If you're behind on payments, debt restructuring can help you avoid defaulting on the loan or credit card, which can exacerbate an already difficult situation.

Cons of Debt Restructuring

  • May not be available: Lenders aren't required to work with you if you're struggling, and depending on your situation, you may not be able to get the relief you need.
  • Can damage your credit: If you're no longer paying your loan as originally agreed, the lender may add a note to your account reflecting that, which could hurt your credit score and make it harder to get approved for credit in the future.
  • Can take a while: Negotiating with lenders can take time and effort, especially if you need to work with more than one. If you need immediate relief, you may also need to request forbearance or deferment of payments.

Debt Consolidation vs. Debt Restructuring

Debt consolidation and debt restructuring share the same goal: help make your debt more manageable through more favorable loan terms. But that's about the only real similarity between the two. Here are some differences to consider as you try to determine which is better for your situation:

  • Debt consolidation is best if you have good credit, while debt restructuring doesn't typically involve a credit check.
  • You may consider debt restructuring if you're experiencing financial hardship, while debt consolidation is best considered before you get to that point.
  • Debt consolidation can help you get better terms and save money without significantly impacting your credit—in fact, it could increase your score. In contrast, debt restructuring can hurt your credit because you're no longer paying as originally agreed.
  • Debt restructuring involves making changes to your existing loan contract, while debt consolidation uses a new loan to replace existing debt.

Choosing the Right Option for You

Debt consolidation and debt restructuring are effective ways to tackle debt, but the right one for you depends on your situation. For example, if you're behind on payments or you've recently experienced a major change in your income, debt restructuring may be the better choice.

On the flip side, you may consider debt consolidation if you're still current on payments and you simply want to streamline your payments and save money.

Whatever you do, consider how both choices could potentially impact your credit score and overall financial well-being in the long run. While debt restructuring can damage your credit, it may be preferable to default, bankruptcy and other solutions that can do even more harm.

If you're thinking about using a debt consolidation loan or balance transfer card, check your credit score to see where you stand. You may also consider using Experian CreditMatch™ to get matched with loans and credit cards based on your credit profile.