Tuesday, July 23, 2024

Alternatives to Debt Consolidation Loans

Last updated on February 22nd, 2022 at 10:33 am

A debt consolidation loan can effectively help manage your debt, but you must be careful to select the right loan for you. It can merge loans with high interest, such as payday loans, credit card debts, and other debts, into a single fixed-rate loan. The money from this loan is used to clear off other debts, and you’re left repaying a single loan instead of multiple credit facilities. However, this strategy only changes your creditor instead of helping you clear off the debt. 

Fortunately, there are a couple of ways that you can use to pay off your debts entirely. This post highlights seven alternatives to debt consolidation loans that you can use to manage your loan effectively. 

7 Alternatives To Debt Consolidation Loans

  1. Have A Strict Budget Plan

Irresponsible spending is the leading cause of most people getting into debt cycles. Creating and adhering to a budget, on the other hand, is the fastest and easiest way to solve debt problems. And with the advent of technology, there are many apps that you can download to help you with budgeting. 

You Need a Budget (YNAB), Mint, Simple and PocketGuard, are a few phone applications that you can use to track where every dime of your income is going. Furthermore, they’ll even inform you that you’re spending above your budget. 

  1. Home Equity

Homeowners are frequently enticed to seek loans against their homes, but this can be a dangerous option for those attempting to settle their debts. While home equity loans or lines of credit (HELOC) come with lower interest rates than personal loans or credit cards, their possible downside can be too huge to bear. 

Credit cards are unsecured loans, so your property will not be at the risk of being seized if you default on the loan. Nevertheless, if you borrow a loan and use your house as collateral, it’ll be taken if you fail to repay the loan. 

  1. Credit Counseling Programs

Consult a nonprofit credit counselling service about your circumstances before opting to combine credit card debt. A professional credit counsellor can help you assess your debt and recommend the best course of action.

The consultant will go through your debt reports with you, advise you on managing your income, and help you prioritise your bills. The counsellor may next recommend a DMP (debt management plan), debt settlement, debt consolidation, or bankruptcy (if no other options appear to be viable).

You are always welcome to consult legitimate firms such as Reform Debt Solutions, which offer free financial relief debt assessment services to all Britons. 

  1. Refinance Your Credit Card

Refinancing credit cards is a long shot with poor credit. Nevertheless, it might be able to assist you to escape subprime loans. To receive a debt transfer card, you’ll need a credit score of 670 or above.

And this is the opportunity you’ve been looking for to get out of debt! If you have a credit score in the 670 range, shop around to see if you can find one. If you meet the requirements, you can pay 0% interest on your credit card debt for a limited time (12-18 months). 

Corporations will not provide you with a balance transfer card to substitute your credit card. This makes it easier for other companies to persuade you to transfer to their card.

  1. Debt Settlement

Whenever you’ve delayed paying your credit card debts for a long time, creditors may decide to take a lump-sum payment for a fraction of what you are due. Debt settlement is the process of making fewer payments of the loan you owe a creditor to resolve a debt.

If you cannot organise a consolidation strategy, debt settlement may be an option, but it has drawbacks. It’s a seven-year black mark on your credit record, resulting in a massive decline in your credit rating. 

Moreover, if you don’t make any monthly payments, you’ll significantly negatively influence your credit score. However, through a professional credit counsellor, you can weigh your options.

  1. Debt Management Plan

Credit counsellors can assist you in developing a debt management strategy that allows you to repay many lenders with a lower monthly payment and lower interest. More importantly, your credit rating isn’t a deciding factor in whether or not you’ll be accepted into the course.

The nonprofit counselling organisation operates with lenders to cut the interest rate to 8% or less. Counsellors will contact your lenders and negotiate a payment plan that will allow you to repay your loan in three to five years. You’ll make a monthly payment to the counselling organisation. They will then deliver it to the creditors in the proportion negotiated.

It’s ideal to go with a nonprofit credit counselling organisation that has been certified by the National Federation for Credit Counseling (NFCC). It would help if you avoided firms that offer acceptance and ask for payment before communicating with your lenders. If you’re looking for a list of respectable businesses, please consult the state attorney’s office.

  1. Bankruptcy

Bankruptcy is a last-resort option that no one wishes to take, yet it is viewed as a free shot to get your financial house under control.

Under Chapter 7 bankruptcy, the bankruptcy trustee can sell your non-exempt assets to pay your debts, sometimes referred to as liquidation bankruptcy. It will be a black note on your credit record for ten years.

Additionally, Chapter 13 bankruptcy permits you to design a 3-5 year payback plan that may not cover all of your debts but is adequate to wipe off debt in the eyes of the court. It will be a black mark on your credit record for seven years.

Bottom Line

Although consolidating your high-interest debt with a debt consolidation loan might save you money if you can get a reduced interest rate, it isn’t your only alternative. In certain circumstances, taking a different course is a superior option; for instance, a home equity loan is a secured loan guaranteed by your house and can potentially get you a better rate.

Nevertheless, it’s equally crucial to be aware of the hazards associated with such a decision. Before proceeding, look around for several solutions and examine the interest rates, payback periods, and trade-offs you’ll have to accommodate with each of the options above.


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