Debt consolidation loans are personal loans that combine multiple debts into one account and are issued based on your creditworthiness, which means they aren’t the best choice for everyone. Luckily, there are other debt consolidation options that don’t involve this type of loan.
Debt Consolidation Loan Alternatives
Because debt consolidation loans are unsecured personal loans, lenders may impose strict qualification requirements. This can make it difficult for people with low credit scores to qualify or get the amount they need. If you can’t pre-qualify for a good offer, here’s how to consolidate your debt without a loan.
1. Budget Adjustment
Before applying for a debt consolidation loan, evaluate whether your problems could be solved with a few adjustments to your budget. This could include:
- Delete subscriptions or share accounts you no longer use.
- Eliminate or reduce unnecessary expenses.
- Looking for cheaper car insurance, internet, home insurance or cell phone plans?
- When shopping, replace name brand items with store brand items.
These may seem like small steps, but they could generate cash that can be put towards paying down debt.
- Best for: Tackling small debts.
- reason: Cutting a few expenses here and there probably won’t save you more than a few hundred dollars a month.
2. Balance Transfer Credit Cards
A balance transfer card allows you to temporarily consolidate your other credit card debt (usually only from other companies’ credit cards) at a 0 percent interest rate.
This low-interest promotional period is usually 12 to 18 months, but some cards offer periods up to 21 months. You’ll likely only be approved if you have good to excellent credit.
Once the introductory period ends, you’ll be obligated to pay the card’s standard interest rate on any remaining balance. Additionally, most cards charge a balance transfer fee, usually between 2 and 5 percent of the total amount you transfer.
- Best for: Borrowers with good to excellent credit who are looking to pay off their credit card debt.
- reason: Balance transfer credit cards are primarily suited to those who are struggling with credit card debt because they allow you to consolidate multiple debts this way. Balance transfer cards are also a smart choice for disciplined consumers who don’t want to add to their debt with a new credit card.
3. Mortgage or HELOC
Home equity loans and home equity lines of credit (HELOCs) are loans that allow you to borrow against the equity in your home. Home equity loans have a fixed interest rate and monthly payments that are fixed, while 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 make payments.
Most home equity loan providers require that you have at least 20 percent of your home’s value collateralized. Compared to debt consolidation loans, home equity loans and HELOCs often have longer repayment terms, larger loan amounts, and lower interest rates.
- Best for: Budget-conscious homeowners.
- reason: A mortgage is the best option for borrowers who need to cover large expenses and know exactly how much they need. If you need flexibility in the amount you borrow, a HELOC is a better choice.
4. Cash-out refinancing
In a cash-out refinance, you replace your existing mortgage with a new mortgage that’s greater than your current outstanding balance. This method requires that you have some equity in your home. You can take out the difference between the two balances and use it for home improvements or debt consolidation.
As with any mortgage or HELOC, you risk losing your home if you can’t repay the new loan.
- Best for: A borrower who owns a home but does not have good credit.
- reason: Borrowers with fair or poor credit may have a better chance of being approved for more favorable terms on a cash-out refinance than other options for a debt consolidation loan. However, the complicated process makes this approach best suited for those with large amounts of debt.
5. Debt consolidation
Debt consolidation is when you negotiate with your lenders to pay less than what you owe in order to repay your debts. You can negotiate with your debtors yourself, or you can pay a debt relief company or lawyer a fee to negotiate on your behalf. However, not all creditors will negotiate with debt consolidation companies.
This strategy can damage your credit score. Most lenders won’t renegotiate your debt unless you’re significantly behind on your payments. A debt consolidation company may tell you to stop making payments so they can send your debt to a collection agency.
If your settlement negotiations are successful (and there’s no guarantee), the settled debt will be noted on your credit report. This will remain on your credit report for seven years and could make it harder for you to get new credit.
- Best forPeople who are over $10,000 in debt and struggling to make monthly payments.
- reason: Debt consolidation can have a negative impact on your credit for several years. Debt relief companies also charge a fee of 15 to 25 percent of the debt you sign up for, which can eat into your savings. And there’s no guarantee a settlement will be reached, so you could be liable for late fees and additional interest. That said, if you’re struggling with debt and your other option is bankruptcy, it may be worth considering.
6. Debt Management Plan
Credit counseling agencies offer debt management plans, in which you work closely with a counselor to evaluate your debts and determine the best approach to dealing with them. Typically, the counselor will contact your creditors to try to make your debt more manageable. The counselor may be able to help you clear some accounts or lower your interest rates or monthly payments.
You make monthly payments into an account set up with a credit counseling agency, which then pays your creditors. Plus, they give you the tools to stay out of debt.
- Best for: People with large amounts of debt who are looking for debt consolidation alternatives.
- reason: Like debt consolidation, debt management plans are designed for consumers who are truly struggling with debt. Although these plans can also affect your credit, they are a cheaper and less damaging alternative to debt consolidation.
7. Bankruptcy
Filing for bankruptcy involves going to federal court to have your debts discharged or restructured to give you a longer repayment period. That said, some debts are very difficult to discharge, such as federal student loans and tax debts.
Before choosing this option, keep in mind that it could take a big hit to your credit score that could take years to recover.
- Best for: People who have exhausted all other options.
- reason: If you’re looking for a fresh start, bankruptcy might make sense. But if you go down this route, it’s best to make a commitment going forward to paying your bills on time, creating a budget, and avoiding the habits that got you into so much debt. These steps will help you recover from bankruptcy instead of struggling again.
Why debt consolidation is not the best strategy
Debt consolidation loans can simplify your debt repayments and even help you save money in the long run. But for them to be effective, you need to identify and address the financial habits that got you into that situation in the first place. Otherwise, you’re just shifting your debt from one place to another, not solving the problem.
Continuing with unhealthy spending can lead to further debt and a worsening financial situation.
If you have bad credit, consolidation options such as bad credit loans may not be the best approach for you. This is because most lenders charge higher interest rates to those with bad credit to reduce their risk. This, combined with fees, makes these options more expensive and defeats the purpose of making your debt more manageable.
Conclusion
If you can secure a lower interest rate, a debt consolidation loan can make financial sense. In some cases, choosing an alternative option may be a better choice.
If you need to know how to consolidate debt without taking out a loan, consider all your options. Consider factors like eligibility requirements, interest rates, fees, and repayment terms. Additionally, consider the risks and trade-offs of each option and calculate how much you could save before moving forward.
