Are All Debt Solutions Right For You? - Debt Consolidation USA (2024)

Being in debt is a lonely, frustrating experience. When you owe thousands of dollars to multiple creditors and can barely afford to make the minimum monthly payments on your bills, it can feel like the entire world is out to get you.

The good news–you’re not alone. Like you, millions of Americans are living through a spiraling debt nightmare, looking frantically for a solution to a problem that often seems intractable.

Don’t believe anyone who tells you that there’s a simple, pain-free route out of debt or a one-size-fits-all solution that works for everyone. Your debts are unique, comprised of a particular blend of credit card bills and medical bills, outstanding personal loans and other unsecured obligations whose astronomical rates of interest collectively drain thousands of dollars per year from your savings.

There are five common solutions to the problem of serious debt. Each has its own advantages and disadvantages and may be more or less ideal for your particular predicament.

Your default option is simply to do nothing and let your debt situation unfold naturally. Of course, there are several problems with this approach.

First, ignoring your debt situation may be the best way to make it worse. Even with rates near record lows, your creditors are probably demanding double-digit APRs on many of your outstanding debts. If you miss a minimum payment, you’re usually docked with late fees, penalty interest and other associated costs that immediately add hundreds of dollars to your already-high burden of debt.

When you’re in debt, each new month is like a new chapter in your own personal nightmare. You’re forced to make unpleasant choices about what to do without, which can be especially painful if you have a family to support. While making your minimum payments and just barely sliding by without allowing your debts to overwhelm you completely may be the easiest and least painful option in the short term, it’s not really a long-run solution.

Unless you anticipate a major jump in your earnings in the near future, it’s unlikely that your debts will take care of themselves. Most creditors’ minimum monthly payments are set low enough that they don’t do much more than cover the interest accrued on your outstanding obligations. Significant debts, on the order of several thousands dollars or more, can take years or decades to pay off in full with the “do nothing” option.

If you’re sick of doing nothing and watching your debts continue to mount, you may be considering a debt consolidation loan. This is a growing business: Helped along by well-produced television and Internet ad spots that promise eye-popping results in short order, thousands of Americans take out debt consolidation loans each year.

As their name implies, debt consolidation loans are loans that are generally large enough to enable you to pay off your existing debts in full. In theory, this is advantageous because it replaces a confusing array of outstanding balances with a simple, easy-to-understand monthly loan payment.

Many providers claim that interest rates on debt consolidation loans are competitive, saving those who use them thousands of dollars per year compared to their existing debts. This is dubious: Even if you have mediocre credit, which may be optimistic to assume if you’re thousands of dollars in the debt hole, you’ll have trouble finding a debt consolidation loan with an APR of under 14 percent.

Assuming you pay about 20 percent on your existing credit card balances, that’s only a savings of $600 per year for every $10,000 of debt. That’s not insignificant, but the fact remains that a debt consolidation loan is still just another form of debt.

In contrast to the aggressive marketing techniques of debt consolidation loan providers, many non-profit credit counseling services take a lower-key approach to debt relief. Credit counselors bundle your debts and replace your multiple monthly payments to individual creditors with a single sum, payable to the counseling service each month, that includes a management fee of anywhere from $25 to $50.

This service may reduce the day-to-day stress of your debt burden, but it’s unlikely to reduce the burden itself: Although credit counselors can negotiate with creditors to bring your interest payments down somewhat, missing one payment can disqualify you from the program and further damage your credit.

Of course, you can always throw in the towel and declare bankruptcy. You may be able to get many of your debts forgiven this way, but you’ll pay dearly for it. Bankruptcy filings linger on your credit report for a decade or more, making it difficult to secure new credit regardless of how badly you need it. Some bankruptcy courts now mandate the repayment of some supposedly “forgiven” debts on a tight repayment schedule, making bankruptcy functionally similar to this next debt relief option.

Debt settlement can be a powerful solution to debt and is likely your cheapest and quickest way out of debt. Debt settlement providers negotiate with your creditors to reduce the total outstanding balance, not just the interest rate, on each of your loans. Depending on your situation and your creditors’ inclinations, you may be able to settle your debts for 50 percent or less of what you owed originally.

Even better, debt settlement providers rarely charge upfront fees for their services. The one major drawback: Debt settlement negatively affects your credit score for a year or two after the process has completed. The impact of doing nothing or declaring bankruptcy is likely to be far worse, however.

Remember, your debt situation is unique. While there are some tried-and-true methods of paying down your debts and getting back on the road to solvency, there’s no “magic bullet” debt solution that works in every situation. The best thing for you to do is to choose carefully from among your debt relief options and commit the time and effort necessary to put your financial problems to bed once and for all.

Are All Debt Solutions Right For You? - Debt Consolidation USA (2024)

FAQs

Why is it so hard to get approved for a debt consolidation loan? ›

Although lenders differ, most require that borrowers have a good credit score, a low debt-to-income ratio and a steady income. Some lenders cater to borrowers with lower credit or allow for co-signers, which can increase your approval odds and or grant you a better interest rate.

What is the best debt consolidation company in the USA? ›

Summary: Best Debt Consolidation Companies of 2024
CompanyForbes Advisor RatingLearn More CTA text
SoFi®5.0Compare Rates
Upgrade4.9Compare Rates
Happy Money4.4Compare Rates
LendingClub4.4Compare Rates
4 more rows
4 days ago

What are the drawbacks of a debt consolidation loan? ›

Cons of Debt Consolidation
  • May Come With Added Costs. ...
  • Could Raise Your Interest Rate. ...
  • You May Pay More In Interest Over Time. ...
  • You Risk Missing Payments. ...
  • Doesn't Solve Underlying Financial Issues. ...
  • May Encourage Increased Spending.
Apr 9, 2024

Is debt consolidation a good way to get out of debt? ›

Debt consolidation is often the best way to organize your current debt and simplify repayment. Consolidation, if used correctly, offers benefits that could save you money.

Why was I declined for a debt consolidation loan? ›

Not being able to pay your bills has a significant impact on your credit rating. It gives lenders a bad impression. And it's one reason a bank will refuse your consolidation loan application, since the bank will consider you at risk of not repaying the loan.

What credit score is needed for a debt consolidation loan? ›

The minimum credit score needed to secure a debt consolidation loan ranges from 580 to the mid-600s, depending on the lender. The best terms and rates go to borrowers with scores that are around 700 or higher.

Is it a good idea to get a debt consolidation plan? ›

Debt consolidation is a good idea if monthly debt payments don't exceed 50% of your monthly gross income, and you have enough cash flow to cover debt payments. Debt consolidation isn't a quick fix for severe debt problems.

What is the number one debt relief program? ›

Freedom Debt Relief is our selection for the best debt relief service when it comes to customer satisfaction. The firm has been in business for decades, has resolved over $15 billion in debt for over 850,000 clients over the last 20 years and has an A+ BBB rating and a 4.49-star customer feedback score.

Does debt consolidation hurt your credit? ›

Debt consolidation can negatively impact your credit score. Any debt consolidation method you use will have the creditor or lender pulling your credit score, leading to a hard inquiry on your credit report. This inquiry will decrease your credit score by a few points. However, this credit score decline is temporary.

What is one bad thing about consolidation? ›

The potential drawbacks of debt consolidation include the temptation to rack up new debt on credit cards that now have a $0 balance and the possibility of hurting your credit score with late payments. Also note that the best personal loans go to consumers with very good or excellent credit, so not everyone can qualify.

Can I still use my credit card after debt consolidation? ›

If you consolidate your credit cards, you can still use them. Consolidating just means you're paying them off, so your balances will be at zero, but the cards themselves will remain open unless you take the step of closing them.

Is national debt relief worth it? ›

Is National Debt Relief legit? National Debt Relief is an accredited member of the American Association for Debt Resolution (AADR). It has been around since 2009 and has helped over 600,000 individuals reduce their debt. It also has an A+ rating from the BBB (Better Business Bureau).

Who is the best debt consolidation company? ›

  • SoFi. Best debt consolidation loan. ...
  • Oportun. Best for borrowers with bad credit. ...
  • Best Egg. Best for secured loans. ...
  • PenFed Credit Union. Best for low rates and fees. ...
  • Laurel Road. Best for pre-qualification. ...
  • OneMain Financial. Best for fast funding. ...
  • LendingClub. Best for direct creditor payments. ...
  • First Tech Federal Credit Union.
May 10, 2024

Why is it so hard to get a debt consolidation loan? ›

Lenders might not advertise it, but most of them have a minimum credit score required to get a loan. If your score is less than 670, you might be out of luck for a debt consolidation loan. Even if you're over 670, a problematic debt-to-income ratio (more on that below) or payment history could derail your loan.

What are my chances of getting a debt consolidation loan? ›

Borrowers with good to excellent credit scores (690 to 850 credit score) are more likely to be approved and get a low interest rate on a debt consolidation loan. If you have bad credit (300 to 629 credit score) and can take some time to build your credit, you may qualify for a lower-rate loan.

Can anyone qualify for debt consolidation? ›

You'll need good or excellent credit (690 credit score or higher) to qualify.

Is it smart to get a personal loan to consolidate debt? ›

Debt consolidation is ideal when you are able to receive an interest rate that's lower than the rates you're paying for your current debts. Many lenders allow you to check what rate you'd be approved for without hurting your credit score so you can make sure you're okay with the terms before signing on the dotted line.

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