Debt consolidation loans are one of the most popular methods of debt relief for a reason. They often drive down interest rates, save money, and allow debtors to focus on making a single payment each month to eliminate their debt.
That said; debt consolidation loans aren’t right for everyone. They’re also not easily accessible to individuals with bad credit.
Fortunately, many proven debt relief alternatives exist. These alternatives are often ideal for people with bad credit who don’t qualify for debt consolidation loans.
The five alternatives listed below aren’t a comprehensive list of every debt relief strategy in the world. Rather, they’re the five that are most often right for people looking for a way out of debt.
Browse the list below to learn more about these popular alternatives to debt consolidation loans. Then, if you’re ready to take the next step, contact National Debt Relief today.
1. Get aggressive about paying down your debt on your own
Many people who seek debt consolidation loans might not actually need them in the first place. Debt can seem insurmountable, but with a strategy in place and the will to follow through, it’s often possible to eliminate large debts without the help of a third party.
As with any financial plan, the first step is making a budget. Making a budget is rarely anyone’s idea of fun, but it’s necessary to lay the foundation for long-term financial success.
Budgets are easy to make. Simply tally up all of your expenses for a month and subtract them from your total income. You may have to make educated guesses about certain numbers that vary from month to month (such as your grocery bill). In these cases, err on the side of caution and budget a little bit more than you think you might need. You’re far better off coming in under your spending target and saving extra money than you are falling short on cash.
Whatever surplus remains after subtracting your expenses from your income is the money that you’ll use to pay down your debts. It may not seem like much compared to the amount of money that you owe, but over time, it’ll add up.
After making a budget, the next step is choosing a repayment strategy. Two common strategies exist that people generally use, namely the debt snowball and the debt avalanche. Both strategies center on aggressively paying down one debt at a time, but they differ on which debt they prioritize.
With the snowball, you prioritize the debt with the lowest total balance. You will be able to pay off this debt quickly, giving you a quick win and freeing up more funds to pay down other debt.
With the avalanche, you prioritize the debt with the highest interest rate. By eliminating this debt quickly, you’ll likely save more money in the end, although wiping this debt out will likely take awhile.
The snowball works best for most people, as it yields results quickly and helps them to stay on track with paying down debt. The avalanche can be just as effective, but it can be tough to keep up with since it delays the gratification of eliminating a source of debt.
No matter the approach, the key to paying down debt is the same: be aggressive, disciplined, and patient. Results won’t come overnight, but when they do, it’ll all be worth it.
2. Consider a balance transfer credit card
Balance transfer credit cards hit the pause button on the accumulation of credit card interest, making them extremely useful for paying off relatively small sums of credit card debt.
With a balance transfer card, you move your credit card balance for one or several cards over to a single card, essentially consolidating the debt. The ideal balance transfer card has a 0% promotional APR offer. That means that for a set amount of months, it won’t compound interest. This feature makes it much easier to pay the card’s balance, as every dollar spent will go toward eliminating the principal amount.
To make this process work, you must be committed to paying off the entire balance of the card before it begins to accumulate interest. Otherwise, it becomes just another source of debt. Ideally, you’ll be able to calculate how much you’ll need to pay per month to eliminate the balance, and then automate those payments to lock yourself into the plan. If you can afford that, then you can make a balance transfer work for you.
Unfortunately, balance transfer credit cards aren’t for everyone. It can be difficult to gain approval for a card with bad credit, and opening a new card can actually damage your credit score further.
More than that, balance transfer cards require a high amount of discipline. In particular, you need to be able to stop using your credit cards altogether during the payment period. This can be more difficult than you might expect. Transferring a credit card’s balance will free up a significant amount of available credit overnight, which can be an irresistible temptation for some. If you run up your credit card balance, you’ll be setting yourself up for financial disaster when the balance transfer card finally starts to accrue interest.
In the right circumstances, however, a balance transfer can provide the necessary financial breathing room to make real progress toward becoming debt-free.
3. Enter a credit-counseling program
Credit counseling is a service designed to help people who struggle with debt to get a grip on their financial lives. Unlike a debt consolidation loan, credit counseling is accessible to those with bad credit, making it a great alternative.
Usually, the first step in credit counseling is sitting down with a counselor and taking comprehensive stock of your finances. This allows the counselor to see the big picture and help you to identify any patterns of risky or irresponsible behavior that might be contributing to your overall debt problem.
The next step depends on your circumstances. Sometimes, credit counselors will simply educate clients on the basics of financial literacy and help them come up with responsible budgets and spending plans to get their debt in check. In more severe cases, credit counselors put together a debt management plan.
In a debt management plan, the credit counselor will actually go to your creditors and negotiate on your behalf. Usually, the counselor attempts to win some sort of concession, such as waived late fees and reduced penalties, in return for putting together a stable repayment plan.
This repayment plan may last anywhere from three to five years. Over the course of the plan, you will pay a single payment to the credit counselor, who then disburses the payments to your creditors.
The only catch is that you need to be in the debt management plan for the long haul. If you miss payments or otherwise can’t keep up with it, you’ll likely be back at square one.
4. Pursue debt settlement
Debt settlement is an attempt to get your creditors to agree to a single, reduced payment on your debt. It’s accessible to individuals with poor credit scores, making it a good alternative to debt consolidation. Settlement can be a fantastic way to get rid of debt fast while saving a good deal of money in the end. However, it can also be risky and detrimental to your credit score.
Generally, a third-party company handles the debt settlement. You cease paying your creditors directly and instead pay into a savings account managed by the settlement company. Your creditors won’t like this and will likely kick off a campaign of threatening letters and phone calls, but a good settlement company will also endure most of the creditors’ harassment for repayment.
After a significant sum of money is in the savings account, the settlement company will go to your creditors and negotiate on your behalf. The offer will be simple: accept this lump sum payment now and forgive the rest of the debt.
Creditors are often more than happy to take this kind of deal. To them, the difference between the lump sum and the total debt owed is insignificant, while the disruption caused by the lack of repayment is an unwelcome drain on their resources.
Eliminating your debt with a single payment can save you a large amount of money over paying your debts back over time, but it comes with its fair share of downsides. On one hand, there’s no guarantee that your creditors will accept the deal. On the other hand, refusing to pay your bills over a drawn-out period will do damage to your credit score that will take years to undo.
Still, if a debt consolidation loan isn’t a possibility, settlement can be a great alternative.
5. Weigh the pros and cons of bankruptcy
Bankruptcy is a debtor’s last resort. Essentially, when you declare bankruptcy, you’re legally declaring that there’s no possible way you can pay your bills and that you require the court’s intervention to stabilize your financial life. Bankruptcy shouldn’t be the first place you turn when denied a debt consolidation loan, but if you’ve exhausted all your other options, it can be an effective alternative.
Filing for bankruptcy puts you under the protection of the court, shielding you from constant harassment for angry creditors. What happens next depends on the type of bankruptcy filing.
Chapter 7 bankruptcy is a liquidation bankruptcy. The court appoints the debtor a trustee who oversees the case. That trustee reviews all necessary paperwork and procedures and, most significantly, must sell off the debtor’s assets in order to pay back the debts. Of course, the trustee cannot sell everything that a debtor owns. While exemptions vary from state to state, debtors generally get to keep their cars, homes, and most of their furniture and clothing. The total value derived from the sale of the assets doesn’t have to equal the total amount of debt. Once the assets are gone, the debt is as well.
Not everyone qualifies for Chapter 7 bankruptcy, however. Income caps restrict Chapter 7 to low-income debtors without a lot of disposable income. If you make too much money to qualify for Chapter 7, then you’ll likely have to file for Chapter 13 bankruptcy instead.
Chapter 13 is reorganization bankruptcy. In Chapter 13, the court devises a repayment plan tailored to the debtor’s income. Over the course of three to five years, the debtor pays into the plan, slowly but surely paying back creditors. The total payment doesn’t have to equal the total amount of debt, however.
While Chapter 13 may not be as immediate as Chapter 7, it does allow the debtor to retain assets. For debtors who make too much money to qualify for Chapter 7, Chapter 13 is likely their only option.
While bankruptcy does provide a structured and efficient way to eliminate debt, it comes with its fair share of drawbacks as well. Most notably, bankruptcy can destroy a person’s credit score. Chapter 13 bankruptcies remain on a person’s credit report for seven years, while Chapter 7 bankruptcies remain for 10 years. Having a bankruptcy on your credit report will significantly impede your ability to buy a house, a car, or qualify for a personal loan. Still, bankruptcy has helped millions of Americans get out of debt when no other alternatives were possible.
Are you still confused as to which debt consolidation alternative is right for you? Chat with one of our experts at National Debt Relief to go over your options in detail and figure out your best path toward becoming debt-free.
