Maybe you have found yourself in a situation when debt consolidation is becoming a viable solution to your current financial problems. Perhaps, you are faced with financial troubles in terms of barely meeting your monthly debt payments. Also, maybe you have taken on too much debt, and you have missed a couple of payments, and most probably, it will get even worse in the future. For this reason, you see debt consolidation as one of your best options. But, before going for the debt consolidation loan, it is important that you get acquainted with different debt consolidation alternatives available for your debt problem.
Your plan for getting out of financial troubles should involve gathering relevant information about the different alternatives available. Afterward, you could make a fully informed decision and select the debt consolidation or debt consolidation alternative which suits you best. You should understand each alternative about debt consolidation. The different alternatives for debt consolidation are debt consolidation, debt reduction, debt counselor, credit card balance transfer, filing bankruptcy, and debt management plan.
- Debt settlement – is one of the most common alternatives to debt consolidation. While debt consolidation aims to merge your existing debts into one debt, debt settlement deals with renegotiating the debt agreement terms with your lender. Meaning that, when using a debt settlement, you are negotiating with your lender to pay back a portion of the outstanding debt (principal balance). Consequently, the lender agrees to be paid a certain percentage of the outstanding debt amount. Your creditor will accept the partial payment of the principal balance if there is low or no possibility for full repayment of the loan, usually if you are planning to file for bankruptcy. In simple words, your creditor would rather collect a portion of the loan balance instead of risking not getting paid at all. This alternative is most common for unsecured debt such as credit cards or other outstanding bills. Although this alternative is considered to be the most cost-effective, noteworthy mentioning is that it will hurt your credit score. Another drawback or personal limitation for using this alternative is that you should have cash on hand to make the payment of the agreed amount.
- Debt reduction – is taking into account the use of specialized services, such as credit counseling. The credit counseling company is taking actions that will help you (their clients) to withhold (freeze) the payment of certain debts for a couple of months. The aim of this withholding is that the client will have time to accumulate enough funds to renegotiate the payment terms on your debts. Keep in mind that this should be the last alternative you will use if no other alternative is available.
- Debt counselor – whether a company or an individual has the objective to help you during the consolidation process or the debt repayment process in general. The debt counselor will assist in contacting your lenders, (re)negotiate debt terms (principal balance, interest rate, repayment terms, etc.) aimed at reducing your debt. The debt counselor will also help you understand the financial situation you are in and the different options available for your specific situation. Thus, a debt counselor can be considered as an alternative that can ease the process of other debt consolidation alternatives.
- Credit card balance transfer– is an alternative according to which you are taking the balances of all your credit cards and place them in different credit card. The aim of the balance transfer is that you will benefit from possible zero APR offers for a certain amount. Thus you can reduce your interest expense. Moreover, with a balance transfer, you have the possibility to lower the minimum monthly payment. This can be considered to be a credit card consolidation alternative, which is in reality. This is so because you are transferring the balance from multiple credit cards into one credit card.
- Filing bankruptcy – if filing for bankruptcy is an alternative you are considering, then you have two options, the chapter 13 and chapter 7 bankruptcy. When going for Chapter 13 bankruptcy or reorganization, you will make a plan to pay back your unsecured debt following a court-approved payment plan. The monthly payment is set in accordance with your income. Chapter 7 can clear most of your unsecured debts, and at the same time, you might be obliged to liquidate some of your assets to pay your secured creditors. As with some other alternatives, filing for bankruptcy alternative also harms your credit score. This negative scoring will be recorded from seven to ten years.
- A debt management plan or debt management services – is an alternative that involves contacting your creditors and inform them about your aim to pay off the debt. With the debt management plan, you are notifying the creditors about your monthly payment ability. Stated differently, you are informing them how much you can pay each month. You could also try to renegotiate a better interest rate. When going for the debt management plan alternative, you should contact all of your creditors and inform them about your intentions. If this is time-consuming for you, you could find a company that will perform these tasks on your behalf, which means that you will use the debt management services companies, and they will contact your lenders and make the necessary payment. Of course, you will pay the company each month instead of paying all of your creditors. Keep in mind that this alternative can be beneficial if you can’t take a loan.
When faced with limited ability to meet your monthly payments, or even when you become overindebted, debt consolidation could be the first option you will consider. While it is not wrong to use a debt consolidation loan for your financial troubles, it should be asked whether this option is the most appropriate for you. What if there is an alternative, which will enable you to get out of debt without the need for a new loan. Consequently, before deciding your way out of a worsening financial situation, you must be aware of the different debt consolidation alternatives that exist. In addition, always be well prepared and have the needed information for each alternative.