Alternatives to a debt consolidation loan
Home equity
One popular way people pay off debt is to use the equity in their homes. Home equity loans and home equity lines of credit (HELOCs) let borrowers use their homes as collateral in exchange for financing. Just be sure to factor in the risks if you’re considering this option. The lender can seize your home if you can’t make the payments.
Who this is best for: Borrowers who have built up equity in their homes.
Who this is not good for: Those unsure of their ability to maintain the monthly payments.
Home equity loan versus debt consolidation loan: Home equity loans and HELOCs may offer lower rates than debt consolidation loans, though they come with more risks, since your home is used as collateral.
Debt relief services
Debt relief services, including debt settlement companies, offer another way to deal with your debt if you can’t qualify for a consolidation loan. These companies reach out to creditors and debt collectors on your behalf and try to settle the debt for a lesser amount.
If you decide to pursue debt relief services (perhaps as an alternative to bankruptcy), be aware that the fees these companies charge can be steep. Take your time to fully research fees, reviews and other details before applying. It’s also wise to compare multiple debt relief companies before you commit.
Who this is best for: Borrowers who are experiencing financial hardship and cannot pay their debt.
Who this is not good for: Those with a thin credit history or less-than-stellar credit score.
Debt relief services versus debt consolidation loan: Unlike debt consolidation loans, debt relief services aim to eliminate some of your debt without you having to pay it. With that said, pursuing debt relief is a risky move, and it can damage your credit score.
Credit counseling
Another option that can help you get debt under control is credit counseling. Credit counseling companies are often (though not always) nonprofit organizations. In addition to debt counseling, these companies may offer a service known as a debt management plan, or DMP.
With a DMP, you make a single payment to a credit counseling company, which then divides that payment among your creditors. The company negotiates lower interest rates and fees on your behalf to lower your monthly debt obligation and help you pay the debts off faster.
DMPs are rarely free, though, even if they’re done by a nonprofit credit counseling service. You may have to pay a setup fee of $30 to $50, plus a monthly fee (often $20 to $75) to the credit counseling company for managing your DMP over a three- to five-year term.
Who this is best for: Borrowers who need help structuring their debt payments.
Who this is not good for: Those with little wiggle room in the budget.
Credit counseling versus debt consolidation loan: With a debt consolidation loan, you’re in control of your payoff plan, and you can often apply with few fees. With credit counseling, a third party manages your payments while charging setup fees.
Balance transfer credit card
With a balance transfer card, you shift your credit card debt to a new credit card with a 0 percent introductory rate. The goal with a balance transfer card is to pay off the balance before the introductory rate expires so that you save money on interest. When you calculate potential savings, make sure you factor in balance transfer fees.
Keep in mind that paying off existing credit card debt with a balance transfer to another credit card isn’t likely to lower your credit utilization ratio like a debt consolidation loan would.
A debt consolidation loan is also going to offer higher borrowing limits, enabling you to pay off more debt, as well as fixed monthly payments, which make it easier to budget and stay disciplined with paying off debt.
Who this is best for: Borrowers who can pay off existing debt quickly.
Who this is not good for: People with a young credit history or a less-than-average score.
Source: thesimpledollar.com