- 7 min read
- Review the different ways the term debt consolidation is used.
- Define your goals to find a debt consolidation program that meets them.
- Shop around, to find the best debt consolidation program.
How Do I Pick the Right Debt Consolidation Alternative?
The term debt consolidation is used to describe widely different approaches to helping consumers with their debt. If you are looking into debt consolidation programs, you may be looking for help with debt that is spiraling out of control or you may be looking for to roll all your debts into one new loan at a lower interest rate than you currently have. In either case, you have to shop around carefully, to find which of the different debt consolidation programs will help you the most.
Choosing among the different debt consolidation programs can be confusing, especially when they offer widely different products that will affect you differently. You may be looking for a debt consolidation program that offers a service that gets you out of debt as quickly as possible, one that has the lowest overall costs, or one whose program doesn’t harm your credit score. If you do the proper research and take time to define your goals, you can pick from the various debt consolidation programs and find the right program to help you.
A good first step in choosing from the different debt consolidation programs is to think carefully about what you want accomplish. Your current financial situation and your credit rating will be important factors in influencing what choice is best for you.
Use Bills.com’s free Debt Coach tool, to help you find the right debt solution. Debt Coach offers a recommendation based on your goals and the specific details of your financial situation.
Debt Consolidation Loan
You may want to consolidate debt because you want to improve an already good financial situation. In this case, you should apply for a debt consolidation loan when:
- You want the convenience of paying all your bills in one payment. A debt consolidation loan will pay off your current debts and leave you with one payment to your new debt consolidation company. This can reduce your stress, by eliminating the juggling of multiple payments and the chance you miss a payment and incur a late fee or get hit with a drastic hike in your interest rate.
- You want to lower the interest rate on your current debts. A cash-out refinance or HELOC is a good way to consolidate debt into a lower interest loan. Unsecured debt consolidation loans often come with high interest rates, so are unlikely to help you accomplish the goal of a lower-rate loan
- You want to lower the size of your monthly debt payment. Lowering your interest rate can lower you required monthly payment. If you can get a loan that extends the term of the loan, it will also lower your monthly payment
- You have equity in a home, a strong credit rating, and a low debt-to-income ratio. Mortgage lenders have tightened their lending requirements in the past few years. It used to be that weakness in one area could be compensated for by a strength in another area. For instance, a person with a very strong equity position, looking only to borrow 50% of his or her home’s value, could get a loan with less than excellent credit. These days, most lenders will turn down applicants who aren't strong in equity, income, and credit.
Alternative ‘Debt Consolidation’ Programs
If you are struggling with your bills, unable to make your required monthly payments or on the brink of falling behind, you may also be looking to consolidate your debt. Your available debt consolidation options are different than if your finances are in good shape. The kind of debt consolidation program that can help you when you are struggling may be one offered by a debt relief company.
In the debt relief industry, "debt consolidation" is often used to refer to programs that help you get out of debt, where you make one payment to the program each month. Both debt settlement programs and a credit counseling service’s Debt Management Plan (DMP) work this way. Both of these programs are really payment consolidation programs, not debt consolidation programs, because your debts remain in the hands of your original creditors. Regardless of whether or not they are truly a debt consolidation programs, either one may be your best choice for solving your debt problems.
You should look into a debt relief debt consolidation program if:
- You are struggling to make your monthly required payments. If you are unable to make your monthly payment or on the brink of falling behind, a debt relief debt consolidation program like credit counseling or debt settlement may be the only way to resolve your debt problems.
- You want the convenience of making only one monthly payment. Both credit counseling and debt settlement programs have only one monthly payment.
- You want to reduce the size of your monthly required debt payments. Debt settlement programs can offer significant monthly payment relief. A credit counseling program’s may be able to lower the size of your payment, but the reduction will not be as large as you will experience in a debt settlement program.
- You want to speed up the time it takes to get out of debt. It will take you years to get out of debt, making only minimum monthly payments. A credit counseling program’s DMP will get you out of debt in about 4-5 years. A debt settlement program usually lasts about 3 years.
- You want to stop collection calls. A DMP should stop collection calls, as payments are received each month by your creditors. A debt settlement program can lead to collection calls.
Choosing The Right Program: Think Before You Jump
Once you think about your goals and your current financial and credit situation, you should be able to find the right debt consolidation program. Regardless of whether you can qualify for a debt consolidation loan or if a debt settlement or credit counseling program is best for you, certain basic principles apply:
- Shop around to find the best debt consolidation program to help you. If you are shopping for a loan, speak to a few different mortgage lenders, to compare interest rates and fees. Speak to the various lenders within a short period of time. A general rule is that credit inquiries that are made for the same type of product, that are made within 14 days of each other, are counted as one inquiry when it comes to the effect on your credit score.
Quick tip #2
If your credit card debt is stressing you out, contact one of Bills.com's pre-screened debt providers for a free, no-hassle debt relief quote.
- Pay attention to the costs quoted, but don’t let costs be your only consideration. You don’t want to necessarily choose the firm that charges the lowest fees. If you are working with a credit counseling service or debt settlement program, choosing the program that quotes you the lowest fees can be dangerous. The bottom line is what your overall costs will be to get out of debt. You want to find a firm that will do the best job for you, which is not always the same as the firm that charges you the least. Any debt settlement program can only estimate your total costs. A bad firm can lure you to sign up by giving you an unrealistically low estimate. Be wary of any settlement firm that quotes you a payment for resolving your debt that sounds like a car payment,with a fixed number of monthly payments at a specific dollar amount.
- Watch out for scams. If you are looking for help with financial difficulties, you are vulnerable to predators. Be wary of any solution that sounds to good to be true. Be protective of your private information, making sure that you're dealing with a reputable firm before you give out your social security number or any banking information.
- Check out the reputation of the debt consolidation programs you consider. Take the time to do your homework. Use the internet to research the debt consolidation program’s history. Check for accreditation and research what clients have to say. Keep an open mind, but also be skeptical.
Struggling with debt?
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q3 2023 was $17.291 trillion. Auto loan debt was $1.595 trillion and credit card was $1.079 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
The amount of debt and debt in collections vary by state. For example, in Mississippi, 35% have any kind of debt in collections and the median debt in collections is $1598. Medical debt is common and 16% have that in collections. The median medical debt in collections is $719.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.