Are you juggling monthly payments from multiple loans, while struggling to make ends meet? You might be tempted to take out a debt consolidation loan to streamline your payments. But for many debtors, debt consolidation loans are not the best option. When you’re in debt, it’s essential to weigh your options carefully. Before attempting to consolidate your loans, consider these debt consolidation alternatives.
Why might you need debt consolidation alternatives?
For debtors struggling to pay off their debts, debt consolidation can be a great option. But it’s important to remember that it’s not always the right choice. When you’re already deep in debt, you should consider all your options carefully before choosing your path.
Why might debt consolidation be the wrong choice for you?
Because you have bad credit
If you’re looking for a debt consolidation loan, you’re probably struggling with your monthly loan payments. You may even have missed a few payments already. Unfortunately, missed loan payments can do serious damage to your credit score.
If your credit score drops low enough, you may be unable to qualify for a debt consolidation loan. And even if you do qualify, the rates and terms that you are eligible for may be less than competitive.
Because debt consolidation loans have less flexible terms
Even for those that do qualify, the repayment terms of debt consolidation loans generally include set monthly payments. This removes the option of just making the minimum payment, which may make your debt harder to pay off in the long run.
Because debt consolidation loans are too high-risk
Many debt consolidation loans are secured with the debtor’s personal residence. It is always a risk to attach unsecured credit card debt to your home. Visa can’t take your house is you don’t pay them back, but Fannie Mae can and will. Streamlined and reduced monthly payments may be convenient, but they’re not worth losing your home.
Before signing for a debt consolidation loan, review your circumstances, and research all of your options. Alternatives to debt consolidation include consumer credit counseling, debt settlement, and bankruptcy. The most advantageous option will depend on your individual circumstances and the type of debt that you have.
Let’s dig deeper into each of these alternatives.
Debt consolidation alternatives
Credit counselors are financial experts who help you get your finances under control. After looking at your financial history, they’ll work with you to design a plan that balances your expenses and debts with your income and goals.
The right credit counselor can help you to get your debts under control without needing to take out any new loans. They can help you to set a realistic budget and to save enough each month to comfortably afford your monthly payments.
Plus, credit counseling may be cheaper than debt consolidation. Credit counselors typically charge a low monthly fee (often around $50), while debt consolidation loans can cost you in origination fees, prepayment fees, and more.
If you can qualify, debt settlement is another great option to deal with your debts. If you’ve undergone a hardship (e.g., involuntary unemployment, a medical emergency, etc.), a debt relief company can negotiate with your lenders on your behalf to settle your debt for less than the full amount owed. This should both lower your monthly payments and reduce your total debt.
Of course, creditors have no obligation to accept your offer. Typically, they’ll only agree to settle your debt if they feel that you’re unable to pay off the amount in full. That said, hiring a competent debt relief firm certainly raises your chances.
Is bankruptcy a good alternative to debt consolidation?
Debt consolidation loans can be great if you can afford your monthly payments and are looking to streamline them. Likewise, if you have been making your payments consistently and have maintained good credit, you can score a great interest rate. But what if you’re already late on your payments because you simply can’t afford them? If your income can’t stretch to cover your debt payments, a debt consolidation loan won’t solve anything. In this situation, declaring bankruptcy could be your best option.
There are several different types of bankruptcy, but Chapter 7 and Chapter 13 are the most common.
In a Chapter 7 bankruptcy, your assets are liquidated, and a court-appointed trustee is assigned to sell your non-exempt property to repay as much of your debt as you’re able. Any debt that remains after that liquidation gets discharged.
When you file a Chapter 13 bankruptcy, you’ll submit a repayment plan to the court. The plan typically spans three to five years and usually requires the full repayments of certain debts. This option is longer and more costly but does let you keep the property that you’d lose when filing a Chapter 7 bankruptcy. And once the payment plan is complete, all remaining debts can be discharged.
Not sure where to start? Talking to a credit counselor is a great first step. If it’s possible for you to pay off your debts on your current salary, your credit counselor can help you make a plan to do so. And if it’s not, they can help point you in the right direction — whether that direction is debt settlement, declaring bankruptcy, or applying for a debt consolidation loan.