Debt consolidation takes multiple debt balances and rolls them into one new loan. This creates a simpler repayment process by only having to manage a single payment each month. Additionally, you may also qualify for a lower interest rate in order to reduce your monthly payment.
However, it can be difficult to access a lower rate without good credit. And for those who do have good credit, other debt consolidation alternatives may come with better rates and terms. Check out debt consolidation loan rates and eligibility requirements first, then compare the alternatives.
- Debt consolidation loan rates and terms
- Credit card balance transfer
- Home equity loan or HELOC
- Cash-out refinance
- Life insurance loan
- Credit counseling
- Debt management program
- Debt settlement
- Bankruptcy
Debt consolidation loan rates and terms
Credit card balance transfer
This alternative takes an outstanding balance from one or more credit cards and moves it to another card. For those with good credit, you may qualify for an introductory APR that is either extremely low or even 0%. The low rate only lasts for a set period of time, from 12 to 15 months, depending on the lender, so it’s important to know what your APR will be once that initial offer ends.
Also note that if you miss any payments, you could lose your introductory rate and be charged a much higher rate instead. Finally, look for balance transfer fees that may be charged as a percentage of your balance.
When considering a credit card balance transfer as an alternative to debt consolidation, you need to consider the full costs first. Calculate upfront fees and make sure the post-introductory period rate isn’t higher than your current rate (unless you feel confident in paying off the full balance before then). Otherwise, it may not make financial sense to transfer your balances onto a new card.
Learn More: How to pay off credit card debt
Home equity loan or HELOC
A home equity loan or home equity line of credit (HELOC) uses your equity as collateral to secure a loan. Both can be used as alternatives to debt consolidation loans because there are no restrictions on how the funds can be used.
- With a home equity loan, you receive a single lump sum payment and then repay the balance plus interest over a set period of time.
- With a HELOC, you have access to a line of credit, which is similar to a credit card. You can borrow whatever amount you need, and interest only accrues on the outstanding balance throughout the draw period. Once that ends, you’ll enter the repayment phase.
Taking out home equity financing can be a low-interest debt consolidation alternative, especially if you have bad credit. However, there is a risk in using your home as collateral. If you fall behind on your payments, you could risk foreclosure.
Cash-out refinance
Like home equity financing, cash-out refinancing uses the equity in some type of personal property (usually your home or car) to secure a loan. But instead of taking out a second loan, you are refinancing your existing loan into a completely new one — and for a larger amount based on a portion of your equity.
The new loan pays off the old one. That’s the refinance part. But you also receive the difference between the two loans as cash. That money can be used to pay off high-interest debt.
However, a cash-out refinance uses your property as collateral, which puts you at risk of losing it if you default on the loan. Additionally, you are extending your payments on a larger loan amount, which could cost you more over time. This is especially true if you refinance a mortgage for another 30 years.
Life insurance loan
Individuals with a permanent life insurance policy may be able to take out a life insurance loan as an alternative for debt consolidation. Whole life and universal life insurance policies typically include a cash value component. That means part of your premium goes toward investment savings that you can borrow against if necessary.
A life insurance loan generally doesn’t require a credit check, making it ideal for borrowers of all credit profiles. And as long as you make your payments on time, your cash value continues to grow in your policy account.
There are some drawbacks of taking out a life insurance loan. For starters, you need to meet your insurer’s minimum cash value in order to qualify, which means you’ll need to have had your policy for some time. There are also limitations on how much you can borrow, which is usually set at 90% of your current cash value. Finally, if you die with an outstanding life insurance loan, your beneficiaries will receive a reduced death benefit.
Credit counseling
What are alternatives to debt consolidation without taking on new financing? Consider credit counseling, a service that pairs you with a certified counselor to help you determine a plan for your individual financial situation. This option is designed for someone who may have issues managing money and needs assistance. Credit counseling services are initially free; however, if you move forward with a debt management plan, you can expect to pay a monthly fee.
Here’s what you can expect when working with a credit counselor:
- Advice on money management
- Help with creating a budget
- A review of your credit report
- Assistance in crafting a debt management plan
Debt management program
A debt management program is a type of credit counseling that provides you with the goal of creating an affordable solution for getting out of debt. You’ll also receive financial counseling and budget assistance.
When enrolling in a debt management plan, your credit counselor may negotiate with your creditors on your behalf. Instead of paying each account separately, you would make payments through the counseling agency, which then distributes funds to the creditors. It can take three to five years to work through a debt management plan.
Debt settlement
What are alternatives to debt consolidation that don’t require you to pay off the full balance? One option is debt settlement, although it comes with several drawbacks to be wary of. A debt settlement company attempts to renegotiate your debt for a lower repayment amount.
However, the process can be lengthy, and you may be required to stop paying your creditors and put money into an escrow savings account instead. That money is eventually used to entice the creditors to accept a lower lump sum payoff amount, but there is no guarantee they will accept the offer.
In the meantime, however, you will severely damage your credit score by not making any credit payments. And your account will likely incur late fees and penalty charges, plus your creditors could even sue you. On top of that, the debt settlement company will charge a fee, adding to your debts.
Bankruptcy
Bankruptcy is perhaps the most extreme alternative to debt consolidation. There are two common types for individuals: Chapter 7 and Chapter 13. With Chapter 7 bankruptcy, most of your personal assets are sold to pay off your creditors. It’s possible to get an exemption for things like a car that is used to get to work. The remaining balance is discharged, but the bankruptcy stays on your credit report for 10 years.
The other type is Chapter 13 bankruptcy, which generally allows you to keep most of your assets. Instead of liquidating your property, you must commit to a three- to five-year payment plan. After that, any remaining balance is discharged. Chapter 13 bankruptcy stays on your credit history for seven years.
Keep Reading: How does debt consolidation help your credit?