In debt? You’re not alone.
According to one study, the amount of household debt in the United States is at an all-time high – reaching nearly $13 trillion.
Student loans are an increasingly major cause of our national indebtedness.
But high credit card balances, medical bills, mortgages, and other unexpected expenses have left many people juggling bills and fighting high interest rates.
Debt consolidation may be a solution for some, though not everyone will qualify. And even though it can be a convenient way to get back on track, it might not be the best option.
You should examine every possibility before you make a major financial decision and we’re here to help.
Keep reading as we investigate 5 alternatives to debt consolidation worth considering.
What is Debt Consolidation?
Debt consolidation makes the process of repaying your debts simple. It is essentially a personal loan you take out to pay all of your creditors.
You’re left with one monthly payment at a fixed rate, eliminating the hassle of having to meet multiple due dates or combat multiple interest rates.
If your credit score is good (over 660), you are more likely to qualify for a debt consolidation loan with a relatively low interest rate. Pursuing this option might make a lot of sense for you.
However, if your credit score is on the poor end you may end up facing an interest rate that is even higher than what you’re paying now – if you’re approved at all.
Read this to make sure you’ve got all the information you need about these types of loans before you make any major decisions.
Where Do I Begin?
The good news is that there is hope! You don’t have to stay in debt, and there are quite a few options to help get you on the road to financial recovery.
But first, take a serious inventory of your financial situation. Before you can consider any solution you must have a real picture of your needs.
Organize your bills and calculate how much you’re spending monthly. See exactly what your interest rates are on various credits and loans.
Compare what you’re earning to what you’re spending. If there’s an imbalance here, you must fix it before anything else.
Find and eliminate all unnecessary expenses from your life. This isn’t easy or fun, but neither is being in debt.
Once you’ve taken these steps you’re ready to investigate if any of the 5 methods below are the best option to putting you on the path to financial freedom.
Transfer Debt to a Lower Interest Card
Credit card offers are all too common. And, while you should be very careful to carry too many cards, you may be able to leverage the competition for your business to secure a lower interest rate for yourself.
Many cards have an introductory 0% APR. Some offer special deals for balance transfers.
Do some comparison shopping and see if you qualify for a card that will allow you to transfer a balance from a high interest card to one with a lower or zero interest rate.
You might even be able to negotiate a better rate with your current credit card company. Don’t be afraid to call your lender and ask for a better rate.
When you call, have all your information ready and be assertive. The worst thing they can tell you is “no.”
If you are able to transfer your balance, remember that it is a tool to help you manage your debt. It is not a license to dig yourself further in debt.
Debt Management Plan
With a debt management plan (DMP), you work directly with your creditors to devise a repayment strategy.
Sometimes this is also referred to as non-profit credit counseling. A qualified credit counselor can negotiate on your behalf to try to lower interest rates and set up a payment schedule.
If you’re at the point where you’re making late payments and being swallowed by interest rates, a DMP may be the right solution.
The major advantage is that no loan is required. You aren’t taking on any new debt and you have a system in place to regain financial stability without your credit rating taking a significant hit.
There is no guarantee, however, that you’ll be able to get lower rates from all your creditors.
You will also need to have a steady income for this option to be possible. Making all your payments while in a DMP is vital.
And in most cases, your credit lines managed under the plan will be closed.
Consider a DMP if your main priority is reducing your debt without taking on any more loans. For someone with questionable credit and a regular job, this may be the best alternative.
Debt Settlement Plan
Unlike with a DMP, a debt settlement plan (DSP) will significantly reduce the amount you owe. Your overall debt burden may be trimmed by as much as 60% in some cases.
A DSP team will negotiate with your creditors on your behalf and agree to a settlement amount.
Instead of paying your creditors, you’ll make monthly payments into a trust account until your balance is paid in full.
If being in debt has left you feeling trapped, a DSP may be the solution. It can give you the chance to start over.
This is not a quick fix, though, and there are drawbacks.
Enrolling in a DSP will have a major negative effect on your credit score. It may take years to recover.
It will also be difficult applying for other lines of credit while in this program.
And some DSP companies charge exorbitant fees to help you.
Make sure you do your research before signing up for anything.
Home Equity Loan
If you own a home and have been accruing equity in it for years, taking out a home equity loan may be your best option to combat mounting debt.
Typically, you’ll be able to secure a lower interest rate than with a personal loan, saving you money every month.
You can also deduct the interest you pay on a home equity loan when you file your taxes, making this option even more valuable for those that qualify.
Another added benefit is the amount of time associated with most home equity loans. Because you usually have between 5-7 years to pay off the loan, your monthly payments tend to be lower before even considering the reduction in interest rate.
Not everyone will qualify for a home equity loan. Obviously, you must own your own home first.
If you’re considering this option, making your monthly payments is even more crucial because you run the risk of foreclosure if you fall behind.
Borrow from a Friend or Family Member
This last option doesn’t get as much discussion, but it may be a viable last resort before considering bankruptcy.
Your goal is to no longer be in debt and to reach that level of financial freedom with as little damage to your credit report as possible.
If you know someone who is in a position to help you while charging you little or no interest at all, you might be able to improve your financial situation and recover quickly.
Arrange a meeting and devise a payment schedule. Sign a contract or promissory note and stick to the terms.
Treat this person as you would a creditor from a bank.
Need further advice on having this conversation? Start here.
Be very careful with this option because you risk losing your relationship with that person in addition to a lawsuit if you fail to repay them according to your agreement.
You Don’t Have to Stay In Debt
As you can see, there are many options available to you to ease your financial burden. Knowing the choices you have will help you make the smartest decision moving forward.
You don’t have to stay in debt and you don’t have to sort through all these options alone.
Start by taking a serious inventory of your financial situation and then contact us so we can help you find the solution that works best for you.