Debt resolution and consolidation entail combining all of your debt payments into one. There are various options, and each one can reduce your interest costs, speed up the repayment of your debts, and make managing your funds easier.

If you’re able to secure a reduced average interest rate, it might even result in you paying off your debt a little bit sooner than you would otherwise.

Is the Debt You are Carrying Secured or Unsecured?

In the financial world, there are two types of debt, secured debt and unsecured debt. The former requires collateral, so if the borrower misses payments and refuses debt settlement programs, the lender can seize the collateral as repayment.

  • A mortgage is a secured loan and the house serves as the collateral. If the borrower defaults on the loan, the lender seizes the house and resells it.
  • Unsecured debt doesn’t have collateral. All lenders can do is impose strict penalties and if they fail, file a civil lawsuit against the borrower. 
  • A credit card is an unsecured loan. It’s high-risk so lenders are strict about creditworthiness and payment history. Secured debt is relatively low-risk so interest rates and credit requirements aren’t as high.

5 Best Debt Consolidation Options

In the unfortunate event of non-payment lenders always want their investment back immediately. That’s just not possible for people burdened by debt. In this case, the best thing to do is look for a company with an excellent reputation for debt consolidation programs.

There are many types of debt consolidation options, the five best of which are discussed below.

1. Debt Consolidation Loan

A debt consolidation loan takes your current debts and places them under a single loan. You don’t have to pay each creditor individually because your monthly debt payments are managed in one place. You pay a single monthly amount and the loan takes care of the rest.

One of the great things about debt consolidation loans is that they usually have low-interest rates. They also include predictable single payments on time you can budget for every month. 

Your payment history improves and your credit score increases.

2. Home Equity Loan

A home equity loan is a secured loan with your house as collateral. The amount you can borrow depends on your home’s current market value and the balance of your mortgage.

One of the things that make home equity loans so appealing is the low-interest rate. Secured loans have lower interest rates than unsecured loans, and a home equity loan is secured. You will pay more interest than your first mortgage, but the amount is still lower than personal loan rates.

However, loan terms are longer, so you could pay more in the long run. Discuss the suitability of a home equity loan with a company that specializes in all forms of debt relief, including debt consolidation loans and debt resolution.

Your debt management consultant will spend time with you, asking probing questions to see if a home equity loan is right for you. An immediate red flag is the borrowing cycle. You’re caught in a toxic borrowing cycle if you spend, borrow, pay, spend, borrow, pay, etc.

The debt situation worsens so the idea is to use a home equity loan to settle it, but without debt counseling, the cycle is likely to restart.

3. Credit Card Balance Transfer

In a credit card balance transfer, you take the balance from a credit card with a high-interest rate and transfer it to a new card with a low to zero interest rate. The entire balance remains the same but your interest costs are negligible. You can use all the interest you save to pay off the outstanding debt more quickly, which results in even more savings.

A balance transfer card can have a positive effect on your credit score. For instance, your credit score is affected by how quickly you pay off debt. A zero-interest card will help you pay off the principal balance much sooner than a high-interest card.

Balance transfer credit cards aren’t a long-term solution to debt problems. They’re a stopgap that gives you time to gain money management skills before the repayment period ends.

4. Savings or Retirement Accounts

Your 401(k) is there to secure your financial future when you retire, but there are instances when using retirement savings to lessen your debt load makes sense. For one thing, interest rates are lower than on credit card debt. Also, interest payments are reinvested in your account, so you don’t lose too much. 

Job security is important because if your situation goes pear-shaped, you face accelerated repayments and taxes, and penalties. According to the National Bureau of Economic Research (NBER), 10% of people with retirement account loans defaulted.

Unfortunately, the IRS considers defaulting on a 401(k) loan a taxable distribution and if you’re younger than 59.5 years old you’ll incur an early withdrawal penalty. 

Talk to a debt management consultant, to fully understand the implications to your retirement plans

5. Start A Debt Management Plan

A debt management plan (DMP) doesn’t reduce original debt. Instead, you develop a repayment plan that enables you to settle your debt balances in full. Typically, this includes sliced interest rates and waiving late payment fees. 

If you think debt management programs are the best way to get out of debt, you’ll need to work with a credit counseling agency. You and your counselor will devise a debt payment plan that benefits all parties. Your counselor will negotiate repayment terms so you can realistically pay off all debt within three to five years.

All you do is make one monthly payment to the agency, which will be divided among your creditors.

DMPs only apply to unsecured debt. You’ll have to close current credit cards that fall under the DMP and you won’t be able to open any new lines of credit while the DMP is in place. Instead, you’ll be able to pay off your debt quickly while benefiting from counseling that helps you identify debt traps and avoid them in the future.

How to Choose a Debt Consolidation Option?

Choosing a form of debt consolidation depends on several factors, and the most important is if you can afford it.

Look beyond immediate costs. For example, balance transfer offers could advertise a zero interest rate, but they’re introductory rates. Once the period is over, the interest rate increases.

If you have unhealthy spending habits, a credit counselor and a debt management plan could be the answer.

A good way to choose a debt consolidation option is to use SMART goals, specific, measurable, achievable, realistic, and timely. You want a company that helps you determine what SMART means for you and your financial situation. 

We have an array of options to meet all needs, including credit counseling, debt consolidation, and debt settlement programs. If you want to be debt free, reach out to our team by filling out our online form and discuss your situation with a debt expert at Alleviate Financial Solutions today!