Debt Consolidation Solutions to Eliminate Debt

Last Updated: March 15, 2024

Debt Consolidation Guide

In today's financial landscape, juggling multiple debts can feel like an uphill battle. High-interest rates and varying due dates add complexity and stress to your financial life, making it difficult to see a way out. If this resonates with you, you're not alone. The good news? Debt consolidation offers a beacon of hope.

This strategy simplifies your debts into a single, manageable payment, potentially reducing your interest rates and accelerating your journey to debt freedom. Whether you're overwhelmed by credit card bills, personal loans, or student debts, understanding the right debt consolidation approach can transform your financial situation.

Let's dive into the world of debt consolidation, exploring how different solutions can align with your unique financial goals and lead you towards a brighter, debt-free future.

If you'd rather speak to a debt specialist now, click here for a free consultation.

Different Types of Debt

There are four basic types of debt. These include secured debt, unsecured debt, revolving debt, and nonrevolving debt. Debt can fall into two categories at once. Secured debt is debt that has an asset guaranteeing you will repay the debt or the creditor will repossess the asset. These include car loans and mortgages.

Unsecured debt includes loans such as a personal loan, some student loans, consolidation loan, and most credit card debt.

Revolving debt is debt that you can use over and over, such as a credit card.

A non-revolving debt is a personal loan with a set repayment time.

Not all debt can or should be considered for debt consolidation. Credit card debt and other unsecured debt are the best candidates for debt consolidation.

What is Debt Consolidation?

Debt consolidation involves taking out a debt consolidation loan, using the loan proceeds to pay off existing debts, and then paying off the debt consolidation loan.

Your debt consolidation goal is to lower the interest rate and have one affordable monthly payment or even lower monthly payments.

A debt consolidation loan is a fairly simple process as long as you can meet some criteria including your current credit score.

Debt Consolidation Criteria

The first factor to consider is how much debt consolidation you need. Make a list of your loans and whether they are secured loans or unsecured loans. A secured loan is a mortgage, car loans, or other loans that have an asset backing it. For now, you will not consider these secured loans although your debt payment obligations put these first.

Unsecured personal loans include credit card debt, personal loans, some student loan debt, medical bills, and similar loans. When consolidating debt, choose debt that will have the greatest effect on your credit score when paid off.

Write down the total you owe on the unsecured personal loans and the interest rate for all the loans. Add up the total you'd like to pay off. If you have multiple debts, you may not be able to pay off all of them. Choose the high-interest debts to pay off first.

Now you know the debt consolidation amount and what interest rate you need to look for. Do not consider a personal loan with a higher interest rate than you are paying! Since credit card balances often have high-interest rates, you should be able to find a debt consolidation loan with a lower interest rate, just as long as your credit score is decent.

Next, you want to find out your credit score. You will need a credit score over 620 in order to get the best interest rates. If you have a bad credit score, check out our article on debt consolidation loans with bad credit or this article on raising your credit score 100 points.

You are now ready to start looking for a debt consolidation loan that will fit your needs. For the best debt consolidation loans, do your research! You’ll probably also want to also look into the best debt relief companies rated with the BBB out there in general. A debt professional can help you understand all your debt options.

Debt Consolidation Solutions

In this section, we will discuss different options for debt consolidation loans. Before you apply for debt consolidation, take time to research all of them. Each application requires a hard pull on your credit report and this will temporarily decrease your credit score.

Bank or Credit Union

One of the most obvious places to look for a personal loan is a bank or credit union, especially if you have a bank account with them. Credit unions often have better interest rates than do banks. Online banks often have a lower interest rate than brick and mortar banks. While working on the loan approval, make certain you keep up your monthly payments.

You will probably be charged a loan origination fee on your loan and must either pay it upfront or roll it into your loan, decreasing the amount you will have available to pay off your debt. You will also pay interest on these loans. Read the loan agreement carefully.

Financial businesses may offer debt consolidation loans or a debt management program that can help you to get out of debt.

A credit union may take into consideration other factors in addition to your credit report, meaning lower credit scores are not as large an issue. Understanding your finances, credit score, and credit history can help you make the best debt consolidation decisions.

Loan Companies to Consolidate Debt

You may be able to find loan companies or personal loan lenders. Since these can be scams, do your homework and understand what you are agreeing to. Be alert for any excessive interest rates. For more information, you can explore Loan Companies to Consolidate Debt.

Online Debt Consolidation Loans

There are a number of online lenders for debt consolidation loans. Be alert for scams! Online loans can range from $1, 000 to $50,000.

The biggest issue with online loan companies is the interest rates. These can range up from 24% to 35% and you will have origination fees.

An origination fee can reduce the amount you have available to pay off debt.

If your interest rates on existing debts are lower than these rates, avoid online debt consolidation loans.

P2P Loans to Consolidate Debt

Peer-to-peer or P2P loans can be excellent options. Interest rates can be very competitive. Look for P2P lenders online (and be alert for scams). You will also pay origination fees. You may be able to get a P2P loan with a less than good credit score. For more information, you can explore  P2P Loans to Consolidate Debt.

Zero Balance Transfer Credit Cards to Consolidate Debt

A zero balance transfer credit card allows you to transfer all your credit card debt to one card with no interest rate for a limited amount of time.

Balance transfer credit cards can be a great option if you have a plan to pay 100% of the debt within the time limit and you do not plan to use the credit card for any purchases. Almost all credit card companies offer a zero balance transfer credit card.

These credit card balance transfers often come with very high-interest rates on purchases and on any balances once the introductory period ends. Your interest rate will depend on your credit score.

While there is not an origination fee, there is usually a balance transfer fee of 3-5% of the credit card balance transfer and possibly other fees.

Since credit card debt is one of the leading causes of debt, be cautious about adding additional credit card debt. Credit card companies make their money on through the interest rate, fees, and penalties, so know what you are agreeing to!

Borrow from your 401K to Consolidate Debt

Your 401K may seem like a good place to borrow from. However, this option comes with a tax penalty.

In addition, you may plan to repay the money over time, but you will never be able to recover the lost interest on your retirement money.

This is not a good debt consolidation program and should not be considered.

Secured Loans to Consolidate Debt

You may be able to take out a secured loan like a home equity loan to pay off your debts. Because these types of personal loans are secured, interest rates are often far lower than other personal loans and your credit score is not as important.

The issue with secured personal loans is that you can lose the security if you default. This means you could lose your home.

Since unsecured debts rarely mean you are at risk of losing your home, taking out secured personal loans to pay off unsecured debt should take careful consideration.

Secured loans can come with a number of fees including an origination fee, so understand what you are applying for.

Debt Consolidation Companies

There are professional  debt companies that will help you to find personal loans and then pay off your debt as part of their debt consolidation program. If you need help, a debt consolidation company may be an excellent option and they may offer several debt consolidation programs.

Always read company reviews and check out the debt consolidation company online to make certain it is reputable. You should be able to read reviews of their debt consolidation program from both real clients and professional reviewers.

Other Considerations

Now that you have all the information you need to make a decision about debt consolidation programs, should you consider a debt consolidation solution?

Ask the following questions:

• If you have a bad credit score, can you work on improving that number?
  
  
• If you have bad credit, can you improve your credit history?
  
  
• Can you make the monthly payments not just on the personal loan but on any other debt?
  
  
• Can you get a lower interest rate than you have on the older debt?
  
  
• Can you stop running up debt (not increase credit card debt) for at least 6 months?
  
  
• Do you have a plan to stay out of debt in the future?
  
  
• Can you afford to risk your home if getting a home equity loan?
  
  
• Do you understand all the fine print and know the total you will pay each month?
  
  
• Can you make on-time payments?

If you can answer yes to all these questions, you may want to go ahead and apply for the debt consolidation loan. If you are unsure, get a FREE debt relief consultation today!

Debt Consolidation Loans vs. Balance Transfer Cards

In addition to taking out a personal loan to consolidate debt, another option is doing a balance transfer to a 0% APR credit card. With a balance transfer card, you can transfer outstanding balances from high-interest credit cards onto the new card and pay 0% interest for a promotional time period, usually between 12-18 months.

Balance transfer cards typically charge an upfront balance transfer fee between 3-5% of the total amount transferred. Many cards offer 0% intro APR but no balance transfer fee. The Citi Double Cash card, for example, offers 0% APR for 18 months with no balance transfer fee on transfers completed in the first 4 months.

The advantages of a balance transfer include:

• No loan application or origination fees
• A 0% APR period allows you to pay down the principal faster
• May be easier to qualify based on credit score

The downsides are:

• Balance transfer fees can add to overall debt costs
• High-interest rate kicks in after the intro period ends
• Need to make sure the entire amount is paid before the intro APR expires

In general, a debt consolidation loan tends to make more sense if you need a fixed monthly payment plan for several years. A balance transfer card can work well if you can pay off the full balance during the 0% intro period.

Using Your Debt Consolidation Loan

To make your debt consolidation work, follow these steps to pay off your personal loans. Whatever you do, do not spend the money on anything else! Call each creditor and get the pay-off balance. Make that lump sum payment immediately.

If you don't, you will end up with some interest charges, especially on credit card debt. You may be able to pay a personal loan off faster with no pre-payment penalty. If you can pay off a personal loan more quickly, do so and save on interest payments

Set up a budget that avoids using your credit cards. If you need help, consider contacting nonprofit credit counseling agencies that can help you with financial skills . Work on paying off any other unsecured debt while making your secured monthly debt payments

Always make your monthly payments on time

Consequences of Debt Consolidation Programs

Can a debt consolidation program hurt me? Before you take out debt consolidation loans, you may want to take a look at some of the consequences of debt consolidation programs.

A secured home equity loan may or may not be tax-deductible. Talk to a tax professional to understand this situation.

Debt consolidation can also impact your credit score. In the short term, your score may dip slightly due to the hard inquiry when applying for a loan.

However, your score should improve over time as you pay down debts and demonstrate on-time payments on the consolidation loan. An important consequence is that once your consolidation loan is paid off, you'll no longer have access to that credit. It's critical to change any spending habits that contributed to debt accumulation in the first place.

Your credit score may be affected. If can you make on-time payments, your credit score will improve. As you pay down personal loans, your credit score may take a small hit. It will recover!

Other Options to a Debt Consolidation Loan

If you are not certain that a debt consolidation loan is for you, there are several other options you may want to look at before you make a decision.

Debt Settlement Companies

Debt settlement is a way to decrease debt by negotiating a lowered debt amount or decreased interest rate that is then paid off by a lump sum payment.

Your goal is to make a monthly payment into a savings account. Debt settlement can save money.

There are tax consequences and other concerns, such as a temporarily decreased credit score, associated with debt settlement. For more information, give us a call to see if debt settlement is right for you.

We are a multi-state debt settlement company providing national debt relief to those who need it the most!

Nonprofit Credit Counseling Agencies

A nonprofit credit counseling agency offers education on how to manage finances, set up a budget, and other important financial concepts.

These often involve a debt management plan that may include debt settlement with lowered interest rate and/or debt consolidation. Credit counseling is always a good idea.

Debt Management Plan

A debt management plan is a set plan to manage debt and save money. It may include negotiating a lower interest rate or even decreased debt, a debt consolidation loan, a budget, different monthly payment dates, and other techniques.

These are also known as debt management programs.

Student loan debt can not be consolidated under a debt management plan. There are specialized debt consolidation loan plans for this type of debt. Secured debt can not be consolidated under a debt management plan either.

What Goes into A Credit Score

If you browse through our articles on our debt relief blog, you find many that deal with credit scores. This is because many people do not understand how a credit report and credit score are figured.

The short version is that your credit history is nothing more than a report on how well you do paying your bills. It is not a measure of financial success.

Creditors report details about your personal loans and other debt to credit reporting bureaus. There are three main ones and hundreds of boutique bureaus. Once you have at least 6 months of credit history, your credit score is generated.

The credit score looks at five factors. The most important one is on-time payment of debts. The second most important factor is your debt-to-income ratio and debt-to-credit ratio.

These look at how much debt you have versus how much income you have and how much credit you have available, respectively. Debt to credit ratios pertains mainly to credit card balances.

Paying down your debts improves your credit score. Does debt consolidation hurt your credit score? A debt consolidation loan may or may not hurt your credit score in the short term, but can definitely help you to improve your credit score overall.

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