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What are the Best and Worst Options for Debt Consolidation?

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Dan Steadman

Financial Advisor, DCL

Alsos,What are the Best and Worst Options for Debt Consolidation?

If you are one of the millions of Americans drowning in debt, then you may be considering consolidating your debts. Handling multiple credit card payments, utility bills, medical bills and other debts can become overwhelming, and many people are left feeling helpless. You do have options to consider that may help you reduce or eliminate your debt, but you must be willing to make some sacrifices if you want to become debt-free.

The best option for debt consolidation depends on your specific financial situation. For some, a debt consolidation loan may be the best option, while for others a balance transfer or debt management plan may be best.

Speak to a Credit Counselor

Many non-profit organizations offer credit counselors who can help analyze your finances to determine your best options for reducing or eliminating your debt. A credit counselor is a professional who has experience in finances and debt management and reduction. In some cases, debt consolidation may be the best choice, but the credit counselor will give advice and provide recommendations for the best options for your finances.

Reduce Your Debt on Your Own

In most cases, one of the best options is to reduce your debt without using a loan or other service that may come with a fee. If you are in default on multiple accounts, you may need relief more quickly, but you may still want to consider reducing your debt on your own. It will take some determination, and you will have to cut back on extra expenses, but it is much cheaper to make small lifestyle changes than to use any type of debt consolidation loan or debt management plan.

Develop a Budget

Even if you are not sure you can do it on your own, you should still take the time to evaluate your finances and develop a budget. After all, if you pursue a debt consolidation loan or a debt management plan, you will need to have an idea of your expenses and be sure the monthly payments are lower than what you are currently paying.

Start by making a list of all your debts and all your expenses. The debts with the highest interest rates should be at the top of your list.  Credit cards tend to have some of the highest interest rates, so they will probably all be toward the top of your list. Why are these at the top? Because you want to eliminate your debt with the highest interest rate first, since this is the debt costing you the most money in interest charges. You can see this better with a credit payoff calculator.

Cut Your Expenses

If you are considering a debt consolidation loan, the only way to overcome your debt is to begin managing your finances responsibly. You will need to be honest with yourself about your spending habits and acknowledge the areas you can cut back. Successfully eliminating your debt will require that you stop accumulating additional debt, which means you will need to live off your income alone without using credit cards. Ream more about which debt to pay off first.

You can reduce your expenses in many ways. For example, you can cut your food bill by eliminating eating out, clipping coupons and buying off-brand products. If you base your grocery shopping on store sales, you can save additional costs in the checkout line. You can reduce your transportation costs by walking or biking instead of driving, or perhaps you can join a carpool. Small cuts can add up to significant savings, so don’t be afraid to start small and see where you can make the biggest impact.

Increase Your Income

Increasing your income will not only allow you to live without credit cards, but it can also help you pay off your debts faster. It may be easier than you think to increase your income. You can pick up a second job, but it doesn’t have to be a fixed schedule. Maybe you can offer lawn mowing services or babysitting, or you can look online for jobs you can do from home. The options are limitless, and it just takes a little research to find something that can work for you.

Balance Transfers

For some consumers, a balance transfer can help consolidate their credit cards into one monthly payment by transferring each balance into one single credit card. A balance transfer will allow you to consolidate your credit card debts, but it also comes with fees and stipulations that can end up costing you more money in the long run. Many credit card companies offer a 0% introductory rate on all balance transfers, which attracts many consumers because it sounds like a great deal.

If you use a balance transfer to consolidate your debt, you will be charged a fee between 2% to 5% of the total amount transferred. After the introductory period expires, the annual percentage rate (APR) may rise to or above 25%, so it is important to read the fine print and understand the details of the balance transfer before you apply. If you make one late payment, the interest rate may increase even more, so be sure to make your payments on time.

Most consumers who have success using a balance transfer are able to significantly reduce the balance before the 0% introductory period expires. This type of consolidation option will only work to reduce your debt if you stop using your credit cards and if the interest rate is lower than what you are currently being charged.

Debt Consolidation Loans

A debt consolidation loan allows you to consolidate your unsecured debt such as credit cards, medical bills, cash advance or payday loans or personal loans into one single payment. Of course, the loan comes with a fee and some can have extremely high interest rates, particularly if you don’t have a good credit score. Most bill consolidation loans, as they’re also called, have annual percentage rates (APR) between 5% and 36%. Typically, the lower your credit score, the higher your interest rate will be, because the lender is assuming a greater risk. In most cases, you will also be charged a loan fee that is a certain percentage of the loan amount, usually between 1% and 5%.

When asking yourself should I consolidate my credit card debt remember that a debt consolidation loan can be a good idea if it is used responsibly and if you are ready to reduce your expenses to live a life without the use of credit cards. If you get a debt consolidation loan, you should be prepared to only use the money from your income for expenses. Eventually, you may decide to use a credit card, but you should only do so if you can use it responsibly.

Debt Settlement Plan

A credit counselor will provide the most accurate information regarding debt settlement plans (also known as debt management plans). In many cases, the non-profit organization will offer debt settlement services.

With a debt settlement plan, you will use a debt settlement company who will negotiate with your creditors on your behalf to reduce the amount you owe or lower the interest rate. The organization may reduce your debt up to 50% in some cases, but you will also be charged negotiation fees which can add up to almost as much as they saved you.

You will make monthly payments to the debt settlement agency, and they will save that money in an account and use it to pay off your creditors one by one. The disadvantage is that while you are accumulating your money, you continue to default on your payments, which will significantly damage your credit score. In most cases, you will be required to close all your debt accounts, which will also cause a decline in your credit score.

A debt settlement plan can provide some relief from constant calls from collections agencies and creditors, but it does come at a cost. Any amount the organization reduces your debt may be considered income, so you will have to pay taxes on that amount. In addition, the negotiation fees can add up quickly, and you may not end up saving any money by using the debt settlement option. In some cases, people end up paying more with a debt settlement plan than they would have just paying the debt back on their own, without any negotiations.

What to Look for in a Lender

If you decide to use a debt consolidation loan, it is important to choose a legitimate lender who is not trying to take advantage of your financial situation. A legitimate lender will not charge any fees upfront for services that have not yet been provided.  In addition, they will not ask for any personal information before providing details of the consolidation loan options they offer. Lenders should be licensed by the state they operate in or be accredited with the Better Business Bureau (BBB).

The Best Lenders for Debt Consolidation Loans

Lending Club

Lending Club is a great online resource to consider for the best debt consolidation loans, and it is a legitimate website that is accredited with the BBB with an A+ rating. Lending Club is a peer-to-peer lending site that offers a variety of lenders who have different loan terms and requirements. Loan amounts range between $1,000 and $4,000 with annual percentage rates (APR) between 6% to 36%.  The APR will depend on your credit score and your ability to repay the loan, based on your income. The lower your credit score, the higher your APR will be.

Lending Club loans are limited to a 3- to 5-year loan period. Depending on the amount you borrow, this could lead to high monthly payments. In addition, you may have to wait up to or more than a week to receive approval or funding of your loan. Although electronic withdrawals come with no charge, you will be charged a $15 fee for payment by check. You will want to compare these loan details to other lenders in order to get the best deal.

PersonalLoans.com

PersonalLoans.com is an online lending service, but they don’t directly offer loans to consumers. They connect borrowers to lenders, so they are more of a referral service. Lenders will loan up to $35,000, at an APR between 5% and 36%. PersonalLoans.com offers peer-to-peer loans, traditional bank loans and installment loans, so you do have a wide variety of options to review, although some may have minimum credit score requirements.

Since PersonalLoans.com is only a referral service, it can be difficult to identify the fees and APR of the loan unless you put in a request for information. Typically, if you submit a request the lender will contact you to discuss the details. Remember to never provide personal information until the lender has explained all the loan details up front.

Avant

If you have a low credit score, you may want to research Avant debt consolidation loans. They also tend to approve and dispense the loan within one business day, which is nice if you don’t want to wait. Avant offers debt consolidation loans between $1,000 and $35,000, with APRs ranging between 10 and 36%. They are also accredited by the BBB with an A+ rating, so they are a legitimate lender who has a proven track record of success and reliability.

A couple other companies worth mentioning are Freedom Debt Relief and National Debt Relief which are quite popular in reviews across the web. They handle more than just loans and have specific programs for your unique situation.

Finding the Best Option

If you are already overwhelmed by your debt, it can be difficult to determine what the best option is for you to begin managing your finances responsibly. Speaking to a credit counselor can offer great insight into how to reduce or eliminate your debt without damaging your credit score even further. Keep in mind, though, that a debt consolidation loan, balance transfer or debt settlement plan will not eliminate your debt unless you stop accumulating more debts. Also remember it may prove difficult to find debt consolidation loans bad credit direct lender options.

It will take time and dedication, but you can overcome your debt and live a life of financial freedom. Take the time to develop a budget and make cuts where you can. Find the best option for your finances, and stick with the plan until you have succeeded in eliminating your debts. Avoid using credit cards, so you will never have to worry about falling back into that hole again.

Dan Steadman

Dan Steadman

Financial Advisor, DCL

Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems. 

Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.

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