Best Debt Consolidation Companies 2020

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debt settlement

Debt Settlement

Debt settlement is one method to alleviate yourself of debt. In a debt settlement, a debt relief agency contacts your creditors and offers them a reduced amount to resolve the entire debt. Agencies often tell creditors that their clients might just file for bankruptcy if they do not accept the settlement offer, so they take the bait and you are off the hook with at least $10,000 less than what you originally owed.

Debt settlement companies will ask you to cease payments on your bills and to make single monthly payments to them, instead. In turn, your accounts become delinquent, and the debt settlement agency negotiates with a settlement offer on your behalf.

The debt settlement company collects your payments for the meantime and stockpiles them along with a fee so it can use your payments as a bargaining chip in due time.

Because credit card companies collect overdue bills aggressively, you can expect to get a lot of badgering calls from debt collectors within the period where your debt settlement company is still collecting the fees. The credit card company will then write off the debt and sell it to a collection agency for lesser than what it is after 180 days. Your debt settlement company will then negotiate with the collection agency to settle the bill entirely.

The downside to this is that there is no guarantee that the creditor will agree to settle while your late fees, penalties, and dented credit score continue to pile up until a settlement is agreed upon.

  • Quick debt relief solution

  • Your selected debt settlement agency deals with creditors/collectors on your behalf

  • Your creditors/collectors might be opposed to settling

  • Late fees and penalties accumulate

  • The 180-payment default will harm your credit score

Debt Consolidation

Debt consolidation is the method of unifying several debts into a single monthly payment. There are many different ways of consolidating debts, but each one of them leads to the ultimate goal of decreasing your monthly payments through reduced interest rates. Most debt consolidation programs have a term of 3 to 5 years and help you streamline your finances so you can keep up with several debts that have varying due dates.

The debt consolidation program was designed to promote a more abridged payment option through single monthly payments, faster debt repayment, and reduced interest rates. Conventionally, the debt consolidation program meant taking out one huge loan and using that loan to pay off several of your smaller debts, an effective approach if you have a spotless payment history and a high credit ranking. Otherwise, you might only get approved for a loan with a high-interest rate.

debt consolidation

In any case, you still have the option to consolidate your debts through a debt management plan sans a loan. Debt management plans are offered by nonprofit credit counseling agencies without using credit scores as a basis for approvals. Your debts will still be merged into a single monthly payment, however, your credit counseling agency will work with your creditors to lower your interest rates so you can minimize your monthly payments.

Debt consolidation programs are essentially used to settle unsecured debts such as credit card debts, unsecured loans, medical debt, payday loans, collection accounts, and past-due utility bills. Secured debts such as automobiles, homes, and properties are not eligible for debt consolidation programs but may be refinanced.

  • Enrolling in a debt consolidation plan will stop calls from collection agencies.

  • Lower interest rates, reduced monthly premiums, and simplified payments.

  • Credit cards are not allowed, however, some agencies are flexible on keeping an “emergency” credit card.

  • The interest rate is dependent on your credit score, which could be substantially low due to credit card debt.

personal loans

Personal Loans

A personal loan is borrowing money from funding agencies such as banks, online lenders, or credit unions. Unlike other types of loans that have specific purposes or labels attached to it (such as a housing loan or an auto loan), a personal loan can be used by just about anything. You can apply for a personal loan to purchase a new house, renovate your home, buy a new car, pay for your wedding, or to consolidate your debts –take your pick.

Personal loans are typically paid back in fixed monthly installments over 2-7 years with APRs ranging from 6% to 35%. However, rates on personal loans are relatively cheaper and come with higher borrowing limits compared to those of credit cards.

As with all other loans, personal loans are usually approved based on credit score, debt-income ratio, and credit reports. Consumers who maintain an outstanding credit typically get the lowest APR while those with scores 600 below get a higher rate.

  • It has a more favorable interest rate.

  • May be used to consolidate debt.

  • It can be used according to what you need your funds for.

  • Has fixed payments that are required to be paid back on time.

  • It usually involves an origination fee.

Bankruptcy

Bankruptcy is a legal proceeding where a judge and a court trustee evaluate the assets and liabilities of a person or a business that is unable to repay outstanding debts and a decision is made on whether the debts are to be discharged and that the debtor is no longer legally bound to pay them.

The bankruptcy process starts with a petition filed by the debtor or on behalf of a creditor. Bankruptcy laws were made to give individuals a chance to start a clean slate in the event of a financial flop. People or businesses who file for bankruptcy usually perceive their debts to be higher than the actual on-hand funds that they have and do not see the situation changing anytime soon.

While bankruptcy can be a chance to start over and is a plausible solution to preventing foreclosures, repossessions, or debt collection, it can also cause a huge dent to your credit and future economic opportunities and carries some significant long-term fines that will stay on your credit report for at least 7-10 years.  

Happy young couple discussing with a financial agent their new investment

The general rule of thumb is that, if you think that you won’t be able to settle all of your debts in the next five years, bankruptcy might be the best route for you. However, if you feel that you’re financial slump can still be salvaged with a little help, you might want to consider other debt-relief options such as debt consolidation programs.

  • You can start with a clean slate.

  • Eases the tensions of your debt problems and will stop collectors from badgering you.

  • It can cause a major dent on your credit score

  • It can completely block you off from future loans and investments.

Understanding Debt Consolidation

What is Debt Consolidation?

Debt consolidation is a smart and tactical solution to paying off several loans by merging them into one single debt through a debt management program.

Consolidating debt gives you the chance to reduce your monthly payments by enjoying the bonuses of lower interest rates. This program is especially effective on loans that incur high interests like credit cards and also make the entire bills payment process easier and more convenient.

This debt-relief option gives consumers a chance to keep up with several of their bills and disentangle themselves from the mess of debt that they’re currently in. It is also a more convenient way of combining all your accounts and have one less due date to think about.

The initial step to take when you’re considering debt consolidation is to calculate the total payable amount for each of your cards including the average interest rate on each one of them. This gives you a ballpark figure for comparison purposes.

You then need to total your monthly costs such as housing, utilities, food, and transportation. The money left over from all of your necessary expenses matters. For a lot of people, there is usually not enough left to manage their debt while juggling all the other basic monthly expenditures. This is when taking out a debt consolidation loan or a debt management program becomes ideal as it gives you the chance to streamline your debt payments and track your development as you slowly pay it off.

Debt consolidation programs normally have a repayment period of 3-5 years, the average interest rate charged depends on the designated payment term chosen as well as your credit score. Lenders look carefully at your credit score when defining the interest rate they charge for a debt consolidation loan. If you are falling behind paying off your credit card debt, then the chances that your credit score is dwindling are high.

Debt Consolidation without a Loan

You do not need to take out another loan to consolidate your debt. Most credit counseling firms have debt consolidation options through a debt management program without the need to take out a loan. In cases like this, the nonprofit counseling agency negotiates with card companies to lower the interest rate and monthly payments to make it more viable for the consumer to pay off.

The consumer sends a monthly payment to the credit counseling agency, which then distributes the money to each creditor in an agreed-upon amount. The agency may also get the card companies to waive late fees or over-the-limit fees.

This is not a quick solution. Debt management programs usually take 3-5 years to eliminate debt. If you miss a payment, they can revoke whatever concessions were made on your interest rate and monthly payment.

Is Debt Consolidation for Me?

If you feel that you’ve reached the pinnacle of anxiety in dealing with several loans and debts and you want to restructure your finances while slowly becoming economically free, then yes, debt consolidation would be the best program for you.

Credit can seem like a good thing when it allows you to buy things now while paying for it in the future. However, the payment part can pose a challenge to many. Sooner or later, you'll realize that you want to be responsible for your finances and do away with credit card dependence.

Having a compact and preemptive plan will help you attain financial independence. Debt consolidation can be that plan for you. It gives you the option to reach your goal and simplify your bills.

What is Debt Settlement?

Debt settlement is when a borrower negotiates with a lender to pay off the entire debt in a lump sum payment that is lower than the actual amount being owed. An example of this is when you negotiate to pay off an entire loan of $25,000 for just $15,000.

Some creditors agree on a settlement when they see that the borrower is unable to make ends meet and the risks of them not being able to pay off the entire debt is higher. Ultimately, credit agencies will try to avoid bigger losses while protecting their financial bottom line.

How Does Debt Settlement Work?

Debt settlement can be a viable option for you if you’ve had countless skipped payments and your account has been submitted to collections. However, a creditor or a collector will not be open to settling your loan if they believe that you can pay the full amount.

A debt settlement company helps you negotiate with creditors to succumb to settling the loan, this is usually a possible option for unsecured debts such as credit cards. Debt settlement, however, does not work for home or auto mortgages as these can be foreclosed or repossessed.

Debt Consolidation vs. Debt Settlement

Debt consolidation and debt settlement are both financial plans that help ease the load of debt off your shoulders. However, it is important to note that each program differs in function and in tackling the issue.  At a very fundamental level, debt settlement is beneficial when it comes to lowering down the total amount of debt being owed. Debt consolidation, on the other hand, is for decreasing the overall number of creditors you owe. However, secondary benefits, in particular debt restructuring, may be provided by either approach.

Key Points to Consider:

  • Debt settlement and debt consolidation are two different financial strategies that help ease your burden of debt.
  • Debt consolidation lets you merge your multiple loans altogether into one major loan with only one interest rate.
  • Debt settlement helps you reduce your overall amount of debt, while debt consolidation reduces the total number of creditors that you owe money to.
  • Debt settlements allow you to pay a lower amount than what you owe, usually in a lump sum amount, by negotiating with your creditors.

Criteria for Choosing the Best Debt Relief Company

Determining which type of debt relief works best for you is the most important factor to consider in selecting a debt relief company as the approaches that function for each program vary for every consumer.   If you wish to try out debt consolidation, debt management services or DIY, a non-profit credit service firm would be the starting point. Let your advisors offer you some free budgeting advice and solutions to the problem.

Some of the things you want to look for with the credit counseling agency include:

  • Figure out what kind of debt the credit company works with. Many will deal with credit card debt, but some may also deal with student loans or medical debt.
  • Check on customer reviews for feedback on the agency’s programs and services.
  • Visit the company’s website to check on their charges and requirement.
  • Check on the options available if you can’t afford to pay the fees.
  • Ask if they have a minimum or maximum amount of debt required.
  • Verify the loan term and how long it should take to get out of debt.

What are the requirements for debt consolidation?

Generally, most creditors need you to be 18 or above and lawfully living in the United States with a credible bank account and not in the state of bankruptcy or foreclosure.

Borrowers with outstanding credit and low debt-to-income ratios may be eligible for low-end creditor interest rates. Most lenders claim a DTI of 40 percent or less for borrowers.

Those with poor or good credit may have a personal loan that is unsecured based on a steady income and low debt rates, but they should expect a higher rate of interest. The average rate of personal loans is 36% higher.

Many creditors claim that they do not need a minimum credit score, however, that does not mean that they do not review your credit report. You can set goals by knowing your credit profile before applying. Several websites for personal financing provide free access to your account and credit score. Search for an instructional site that offers guidance on how to create credit, including a credit score simulator and guidance.

How to Apply for a Debt Consolidation Loan

If you’ve decided that debt consolidation is the best option for you, consolidating through a personal loan means paying off high-interest debts. Simplify your payments and reduce your debt more quickly. Here are five stepladders for applying  for a personal loan for debt consolidation:

1. Check Your Credit

A negative credit score could disqualify you when you’re applying for a loan and could result in a high-interest rate. Consumers who can maintain a good credit ranking will most likely get immediate loan approval with a lower interest rate.

Generally speaking, the debt being consolidated should be cheaper than the existing debt's total rate of interest. A lower rate lowers the overall interest costs and extends the repayment period.

If your credit is not at a more decreased rate, take some time to reinforce it through these tips:

  • Catch up on payments. Late payments are recorded 30 days after the date that your credit score is due and can eliminate 100 or more points. You still have time to submit your payments if you are within the 30-day timeframe.
  • Scan for errors. Inaccuracies on your credit report, such as payments made for wrongly identified debts or accounts, may affect your score. Check your annual credit report once a year free and challenge the errors, if you notice any.
  • Pay off minor debts. Pay small debts. Debts owed reflect 30% of your loan ranking. Before you consolidate your debt, see if you can pay some high-interest credit cards. It will also help you get an accurate account of your obligations and bills, which will also strengthen your debt-to-income ratio.
2. Take note of your payments and debts.

Write down the debts that you want to consolidate. This could include payday loans, credit cards, and other high-interest debts. You’ll want to prioritize these accounts when you’re applying for debt consolidation.

3. Sum up the amount of your debt each month

Sum up the amount of your debt each month and check your budget for any adjustments in spending that you will need to make to continue paying the debt. The new loan should have a lower monthly premium that is well within your budget. Choose a payment plan and term that coincides with your budget and commit to it.