As if living with credit card debt isn’t already stressful enough, deciding on a debt solution might leave you even more overwhelmed than before. Comparing debt solutions can be tough, but finding the right one could help you start on the road to debt freedom.
Two popular debt management solutions for people in heavy personal loan, medical, or credit card debt are debt consolidation and debt relief. Though both solutions seek to help you overcome your debt, there are big differences between them. That’s why it’s important to understand how debt consolidation and debt relief work, so you can choose the right option for your situation.
What Is Debt Consolidation?
Debt consolidation is a debt management strategy where you combine multiple debts into a single payment. When you use this method, you may be able to simplify your payment schedule and get a lower interest rate than you’re currently paying on your debts.
If you owe more than $5,000 in credit card debt spread over many different cards, debt consolidation could make it easier for you to make a single payment each month instead of worrying about organizing your bills and paying each one on time.
And since average interest rates on credit cards can range anywhere between 13%-23%, certain debt consolidation methods could even help you save on interest. If you’re considering debt consolidation, there are a few different strategies you could use.
How to Consolidate Debt
You consolidate debt by combining it all into one payment each month. There are many ways to consolidate debt. If you choose one of these three popular ways to consolidate debt, that payment could be to a lender, another credit card company, or a debt relief program:
1. Balance Transfer Cards
Credit card companies know better than anyone that the average U.S. household owes $15,654 in credit card debt alone, and they’ve come up with a debt management solution called a balance transfer card. A balance transfer card is a high-limit credit card that allows you to consolidate your existing credit card debt into a single line of credit and gives you a chance to pay it off at a low rate for a set amount of time.
Some balance transfer cards offer promotional rates starting as low as 0% APR for 12 months or more. If you’re carrying multiple balances on cards that have high interest, it’s easy to see why you could be tempted by this offer. But balance transfer cards might not be that great of a deal in the long run.
Many balance transfer cards require you to pay a fee for each new debt that you transfer over to the card.
Many balance transfer cards require you to pay a fee for each new debt that you transfer over to the card. This charge can be anywhere between 3%-5% of the original balance. So, if you were to transfer a credit card debt of $1,000 onto a balance transfer card, you would end up paying your credit card company $30-$50 just to get the balance transferred over. While that doesn’t seem like very much for one single debt, imagine how much you’d end up paying in transfer fees alone if you owed upwards of $10,000!
To make things even less enticing, once the promotional period ends on your balance transfer card, your rate is subject to change. Many balance transfer cards have the same interest rates as any other credit card after the promotional 0% APR period expires. So if you don’t pay off the debt during the promotional period, you may end up with almost the same amount of debt at the same rate that you had before transferring your balance over.
When to Use a Balance Transfer Card for Debt Consolidation
If you have several different debts with high interest rates and can pay off all of your existing credit card debt within the promotional period, balance transfer cards may be the right debt consolidation solution for you. But if you have a lot of credit card debt and can’t afford to pay it all off within the promotional period, a balance transfer card could land you in the same financial situation that you were stuck in before.
2. Debt Consolidation Loans
Another way to consolidate debt is through a personal debt consolidation loan. Personal loans are very popular financial products nowadays, partly because you can use a personal loan for almost anything—like paying for a major expense, wedding, or vacation. But one of the most popular ways to use a personal loan is as a debt consolidation loan.
By rolling all of your unsecured debt into a debt consolidation loan, you may be able to simplify your payments and pay your debt off at a lower rate. Since debt consolidation loans have terms ranging from 24-72 months, they could help you get out of debt in less time than it takes to make minimum payments.
Unlike balance transfer cards, debt consolidation loans are usually fixed-rate loans. Their rates won’t go up unless you miss your payments. Debt consolidation loan rates typically range from 10%-32%, depending on your credit profile, debt-to-income ratio, and other factors.
Although there’s no fee for rolling all your debt into a debt consolidation loan, some consolidation loans require you to pay an origination fee. These fees can range from 1%-6% of the total loan, but certain loan providers waive this fee entirely.
There are two main ways to take out a debt consolidation loan: you could find a loan provider online, or you could go to your local bank or credit union to find a debt consolidation loan. Since different lenders will provide you different rates, it’s a good idea to compare your rates and find the best deal for you before you sign a contract for a debt consolidation loan.
When to Use a Debt Consolidation Loan
A consolidation loan could help simplify your payment schedule and lower your interest rate, but you may pay more each month to get out of debt faster.
For example, if you have $15,000 in credit card debt and are making minimum payments with 16.99% APR, it could take you 258 months to pay off your credit card debt and cost you approximately $450 every month. If you took out a debt consolidation loan with a rate of 13% APR, you could be debt-free in 36 months, but at the cost of $505 every month.
A consolidation loan could help simplify your payment schedule and lower your interest rate, but you may pay more each month to get out of debt faster.
A debt consolidation loan could be worth exploring if you can get a lower rate than you’re currently paying on your credit card debt and you can afford to make your new monthly payments. Unfortunately, some people who are struggling with heavy credit card debt can’t get a good rate on a debt consolidation loan because their credit score is too low and their debt to income ratio (DTI) is too high.
3. Cash-Out Refinance
Homeowners who need to consolidate debt could do a cash-out refinance to pay off their existing credit card debt at a lower rate and have more time to pay it off. By refinancing your home loan and taking out more money than you owe on your mortgage, you can use the additional cash to consolidate your debt. Then, you just continue to pay your mortgage like you normally would, with your unsecured debt rolled into it.
A cash-out refinance is a type of mortgage, and terms are usually 5, 15, or 30 years long. Since the average 30-year fixed mortgage rate in 2017 was 3.99%, a cash-out refinance could provide you a significantly lower interest rate than the debt you’re trying to pay off.
Consolidating debt with a cash-out refinance might seem like an easy choice, but there are risks involved in this debt management strategy. Since your mortgage is attached to your home and is therefore considered a secured debt, your home could be foreclosed on or repossessed if you are unable to pay your mortgage. That’s why it’s critical to make sure you can afford your payments if you decide to use this debt consolidation tactic.
Keep in mind that a cash-out refinance is a mortgage, which means that you may have to pay all of the fees associated with a mortgage when you do a cash-out refinance. Home appraisal, origination costs, and closing cost are still in effect when you refinance—so be prepared to pay these expenses before you consolidate debt with a cash-out refinance.
When to Use a Cash-Out Refi to Consolidate Debt
If you own a home, have a lot of high-interest credit card debt, and can afford the fees and your new monthly mortgage payment, a cash-out refinance could be the right debt management option for you.
Similar to a debt consolidation loan, part of your new mortgage rate is determined by your credit score and debt-to-income ratio (DTI). If you have a low credit score or your debt-to-income ratio is too high, you may have trouble qualifying for a worthwhile interest rate.
Debt Relief Programs
Also known as debt negotiation, debt resolution, or debt settlement, debt relief programs are a debt management solution specifically designed for people struggling with $10,000 or more in personal loan, medical, or credit card debt and having trouble paying it off due to a financial hardship. So if you’re dealing with high-interest credit card debt because of a financial hardship like job loss, divorce, the death of a loved one, medical bills, or because you never learned how credit card debt works, a debt relief program could be right for you.
When you work with a debt relief company like Freedom Debt Relief, you choose which of your unsecured debts you would like help with. Once you enroll your debts into the Freedom Debt Relief program, you set up a Dedicated Account that you control. We also work with you to choose an affordable amount you will deposit into your Dedicated Account each month. This amount could be less than you are paying to your creditors each
While you are making deposits into your Dedicated Account each month, Freedom Debt Relief creates a strategy for negotiating with your creditors to get them to reduce the amount you owe as much as possible.
After enough money builds up in your account, Freedom Debt Relief contacts one of your creditors to negotiate a lower settlement amount with them. When a settlement has been reached, you are asked to approve the settlement and then the funds you have been depositing into your Dedicated Account will be processed to your creditors as payment. This process repeats until all of your debts are settled.
Debt relief programs could reduce what you owe and help you pay off debt faster than making minimum payments.
Debt relief programs like Freedom Debt Relief could reduce what you owe and help you pay off debt faster than making minimum payments takes. But since you choose to stop paying your creditors in order for the negotiation process to begin, you could receive debt collection calls and your credit could be negatively impacted.
Certain creditors may even use legal tactics to get you to pay your full debt amount. However, legitimate debt relief companies like Freedom Debt Relief offer third party legal representation options in case a creditor attempts to take legal action against you.
When to Use a Debt Relief Program
Debt relief programs like Freedom Debt Relief are best for people struggling with $10,000 or more in high-interest unsecured debt like credit card debt, medical debt, or personal loan debt. Federal student loans, auto loans, and mortgages are not eligible to enroll in any debt relief program, including Freedom Debt Relief.
If you are struggling with credit card debt because you have experienced a financial hardship and you are having trouble making your minimum payments, Freedom Debt Relief could help you put your debt in the past.
Founded in 2002, Freedom Debt Relief is the leading debt relief company in the U.S. With over $9 billion in debt resolved, we have helped thousands of Americans get out of debt faster and for less.
If you’re still weighing your options for debt management solutions, a Certified Debt Consultant at Freedom Debt Relief may be able to help you figure out which option is right for you. Request a free debt evaluation to speak with a Certified Debt Consultant now and find out if debt relief or debt consolidation is better for your financial situation.
How to Tell If Debt Consolidation Is Right for You
Debt relief and debt consolidation are sometimes presented as the same type of debt management solution, but they are very different. Depending on your specific financial situation, one solution could be better than the other. If you’re thinking about debt consolidation, there are a few factors to consider first.
Are You Eligible for Debt Consolidation?
Debt consolidation loans, balance transfer cards, and cash-out refinancing each have limits on how much you can borrow. Loan amounts for balance transfer cards and debt consolidation loans could be $1,000-$50,000. To qualify for a cash-out refinance, you need to have equity in your home that you can borrow against. If you do have equity in your home, you may only be able to borrow up to 97% against your home’s current value.
Even if you are eligible for debt consolidation, you may not qualify for a favorable rate that is less that your current debts. Many companies that offer debt consolidation loans dangle ultra-low rates in front of you to get you in the door, but they can’t offer you that kind of rate unless you have an excellent FICO score and a low debt-to-income ratio. If you’re considering a balance transfer card, you may not even qualify unless your credit score is excellent. And if you want to do a cash-out refinance, you might have trouble finding a low rate without excellent credit.
Can You Afford Debt Consolidation?
It’s true that debt consolidation methods could allow you to pay off the creditors you owe faster, but they could also cost you a lot more each month than a debt relief program could.
- Debt consolidation loans extend the amount of time you have to pay off your debt to 24-72 months, so if you consolidate $5,000 or more in debt, you could end up paying more each month.
- Balance transfer cards only really work if you can pay off your debt during the low APR promotional period. And if you want to pay off your debt within the 12 month promotional period, your monthly payments could be astronomical.
- Cash-out refinancing may seem like a better alternative than either of these options, but you’re still adding onto the amount you pay each month for your mortgage and you’ll end up paying thousands in interest if you spread your mortgage over a 15- or 30-year term.
Debt Consolidation: The Bottom Line
Debt consolidation works best if:
- You owe between $1,000-$50,000
- You can afford to pay off your debt during the term of your debt consolidation loan or the promotional term of your balance transfer card
- You have excellent credit and can get a low rate
Even if you qualify for debt consolidation, remember that debt consolidation loans, balance transfer cards, and cash-out refinancing are still a type of debt that needs to be paid off. If you simply roll your personal loan, medical, or credit card debt into a single account and continue spending the way you used to, you could end up in the same situation or worse, with even more debt than before.
How to Tell If a Debt Relief Program Is Right for You
If you don’t qualify or can’t afford to consolidate debt, your best option could be a debt relief program. Since debt relief programs do not require you to take out a loan, you don’t need an excellent FICO score or a low debt to income ratio to qualify. And since Freedom Debt Relief customizes our program to fit your budget and still achieve your goal of debt freedom, you could get out of debt faster and for less than some debt consolidation methods.
Are You Eligible for a Debt Relief Program?
If you are struggling with $10,000 or more in unsecured debt like credit card debt, personal loans, or medical bills, you may qualify for the Freedom Debt Relief program—and it only takes about ten minutes to find out. See if you qualify for our affordable debt relief program now.
People enroll in the Freedom Debt Relief program because they have experienced a financial hardship that has made it difficult for them to make monthly payments on their debt. They may have gotten into credit card debt because of job loss, medical issues, divorce, the loss of a loved one, or because they were never taught how to use credit cards responsibly.
There are no credit requirements to enroll in the Freedom Debt Relief program, and no limit to the amount of debt you can enroll. The only requirements are that you are struggling with unsecured debt over $10,000 and you want to get out of debt.
Can You Afford a Debt Relief Program?
Unlike debt consolidation, which could require you pay hundreds of dollars more each month in order to get out of debt in less time, Freedom Debt Relief works with you to find an affordable amount that fits into your budget each month. It could even be lower than what you are paying to your creditors now.
Instead of paying your full debt amount plus interest like you would with a debt consolidation loan, the Freedom Debt Relief program could significantly reduce the amount you owe creditors and help you be free of the debts in as little as 24-48 months.*
Debt Relief Programs: The Bottom Line
A debt relief program could be the right option for you if:
- You’re struggling with over $10,000 in unsecured personal loan, medical, or credit card debt
- You are having difficulties making minimum payments because you have experienced a financial hardship
- You want to reduce your debt and settle it for less than you owe
Freedom Debt Relief could be the right solution for you if you are struggling with high-interest credit card debt and feel like you’re running out of options. But no matter how you get out of debt, you are making the right choice by learning how debt consolidation compares to debt relief. It’s the first step towards finding the right solution and bettering your financial situation, and we encourage you to continue your research until you feel like you’ve found the right answer for you.
Find out more about debt consolidation programs in your state:
- New Mexico
- New York
- North Carolina
- South Dakota
And we here at Freedom Debt Relief are happy to help give you more answers. Give us a call at 800-910-0065 now or request a free debt evaluation from a Certified Debt Consultant online now. They will be happy to discuss debt relief options with you.
In our first phone call, we’ll help you figure out which debt solution is best for you. There’s no obligation to sign up for our debt relief program, and our Certified Debt Consultants won’t pressure you into a decision you aren’t ready to make. Even if it turns out that our debt relief program isn’t right for you, we want to help you find the right solution for your situation.