Debt consolidation without a loan: this is how you do it

Debt consolidation loans are personal loans that combine multiple high-interest debts into one account with a fixed interest rate and repayment term. These loans are provided based on creditworthiness and are therefore not the best choice for everyone. Fortunately, there are other debt consolidation options available that do not involve this type of loan.

Alternatives to Debt Consolidation Loans

Because debt consolidation loans are unsecured personal loans, lenders may have stricter eligibility requirements. This can make it difficult for people with low credit scores to qualify or get the amount they need. If you can’t qualify for a favorable offer in advance, check out these options.

Budget adjustment

Before applying for a debt consolidation loan, it is important to assess whether the problem can be solved with a few minor adjustments to your budget. These include:

• Remove subscriptions you no longer use or share accounts.
• Looking for cheaper car insurance, internet, home insurance or mobile phone subscriptions.
• Swapping name brands for the store brand while shopping.

While these may seem like small steps, they can free up money that can be used to pay down debt.

• Best for: Tackling small debts.
• Rode: By cutting back on expenses here and there, chances are you won’t be able to free up more than a few hundred dollars per month. Therefore, this approach is better suited for people who want to pay off smaller debts.

Credit card balance transfer

A balance transfer card lets you combine debt from other credit cards (usually just credit cards from other companies) at a temporary 0 percent interest rate.

This low promotional rate period typically lasts 12 to 18 months, although some cards may offer up to 21 months. Only those with good to excellent credit are likely to be approved.

Once the introductory period ends, you will be responsible for paying the card’s standard interest rate on the remaining balance. In addition, most cards charge you a transfer fee on the total amount you transfer, usually from 2 to 5 percent.

• Best for: Borrowers with good to excellent credit who want to pay off their credit card debt.
• Rode: A balance transfer credit card is good for those who struggle primarily with credit card debt because this approach allows you to consolidate several of them. Balance transfer cards are also a smart choice for disciplined consumers who won’t go deeper into debt with a new credit card.

Mortgage Loan or HELOC

Home equity loans and HELOCs allow you to borrow against the equity in your home. While a home equity loan has fixed monthly payments at a fixed interest rate, a HELOC works like a credit card and has a variable interest rate. Both can be used to consolidate high-interest debt, but you risk losing your home if you can’t pay them back.

Additionally, both require that you have a certain amount of equity in your home. Compared to debt consolidation loans, home loans and HELOCs often have longer repayment periods, larger loan amounts, and lower interest rates.

• Best for: Budget-conscious individuals.
• Rode: Home equity loans are generally best for borrowers who want to cover significant costs and who know exactly how much money is needed. HELOCs are a better option if you need flexibility in the amount of money you borrow.

Cash-out refinancing

A cash-out refinance replaces your existing mortgage with a brand new mortgage that is greater than your current outstanding balance. For this approach you need equity in your home. You can withdraw the difference between the two balances and use it to improve your home or consolidate debt.

Just like using a home equity loan or HELOC, you risk losing your home if you can’t pay back your new loan.

• Best for: Borrowers with less than perfect credit who own a home.
• Rode: Borrowers with fair or poor credit may have a better chance of being approved on more favorable terms for a cash-out refinance than some other debt consolidation loan alternatives. However, this approach is best for people with a significant amount of debt due to the complexity of the process.

Debt settlement

Debt settlement occurs when you negotiate with your lender to pay a lower amount than what you owe to pay off the debt. You can negotiate with the debtor yourself or pay a fee to a debt counselor or lawyer to negotiate on your behalf. Be warned: not all creditors will work with a debt settlement company.

But even if you, an attorney, or a company successfully reach a settlement, your credit score can take a hit. This is especially true because most lenders will not renegotiate your debt unless you are significantly behind on payments. The debt settlement company may tell you to stop making payments so that your debts are sent for collection.

• Best for: Those with $10,000 or more in debt, struggling to make monthly payments.
• Rode: Debt settlement will negatively impact your credit for years to come. Debt relief companies also charge fees of between 15 and 25 percent of registered debts, which can reduce your savings. There is also no guarantee that a settlement will be negotiated, so you may be liable for late payments and additional interest. That said, if you are covered in debt and the other alternative is bankruptcy, then this may be something to explore.

Debt management plan

Credit counseling agencies offer debt management plans. You will work closely with a confidential counselor who will evaluate your debts and choose the best approach to tackle them. Typically, the counselor will contact your creditors in an attempt to make your debts more manageable. They may be able to settle certain bills or lower your interest rate or monthly payment.

You make monthly payments into an account set up by the credit counseling agency, and they pay your creditors. You will also be provided with tools to help you stay out of debt.

• Best for: Those with overwhelming debt who are looking for an alternative to debt settlement.
• Rode: Like debt settlements, debt management plans are designed for consumers who are really struggling with their debt. While these plans can also impact your credit, they are a cheaper and less damaging alternative to debt settlement.

Bankruptcy

When you file for bankruptcy, you go to federal court to have your debts discharged or reorganized so that you have time to pay them off. That said, some debts, such as federal student loans and tax debts, are incredibly difficult to pay off.

Before you choose this alternative, keep in mind that your credit score will take a major hit and may take years to recover.

• Best for: Those who have exhausted all other options
• Rode: If you want a fresh start, bankruptcy may make sense. However, if you use this approach, the best thing you can do is commit to paying your bills on time in the future, create a budget, and avoid the habits that have caused you to rack up a lot of debt. These steps can help you recover from bankruptcy instead of struggling again.

Why debt consolidation may not be the best strategy

A debt consolidation loan can simplify debt repayment and even help you save money in the long run. But to be effective, you must first identify and address the financial habits that led to the situation in the first place. Otherwise, you’ll be moving debt from one place to another, which won’t solve the problem.

This could worsen your financial situation by pushing you deeper into debt if the unhealthy spending continues.

If you have bad credit, consolidation options like bad credit loans may not be the best approach either. That’s because most lenders charge higher interest rates to people with imperfect credit to limit risk. This, combined with the cost of incurring debt, can make it costly, defeating the purpose of making debt more manageable.

it comes down to

A debt consolidation loan can make financial sense if you can guarantee a lower interest rate. In some cases, choosing an alternate route may be a better choice.

When choosing a debt consolidation option, consider factors such as eligibility requirements, interest rates, fees, and repayment terms. Additionally, consider the risks and tradeoffs of each alternative and calculate how much you will save before proceeding.