Debt consolidation loan alternatives

While a debt consolidation loan may help you simplify debt or pay it off faster, it’s not the only or always the best option.

Debt management plan

A debt management plan, or DMP, through a certified credit counseling agency can help you create a debt paydown plan in cooperation with your creditors. The credit counselor may also be able to negotiate to forgive fees or lower interest rates on your behalf.

Instead of paying your creditors directly, you pay the credit counseling agency instead, which then sends payments to your creditors. You’re typically required to close the accounts you’re paying off as well, and are not allowed to open new credit accounts.

Fees consist of an enrollment fee and monthly maintenance fees — both modest in comparison to most other debt consolidation alternatives.

Debt settlement (not recommended)

Debt settlement companies offer to negotiate with your creditors to reduce how much you owe. However, you’re often required to stop making even minimum payments as a negotiation tactic, and the process can take years. In turn, this can devastate your credit.

Even if you already have bad credit, settled debts stay on your credit report for up to seven years. Plus, there’s no guarantee that creditors will approve a settlement, and they could sue or seek to garnish your wages for repayment. Payment is usually made to the debt settlement company based on a percentage of the settled amount and only if the company succeeds in settling one or more of your debts.

Debt avalanche or debt snowball methods

If you can’t get a lower rate, or don’t want to sacrifice credit score points to a hard credit pull (required for most new loan applications), it can make sense to keep your current debt and get strategic about paying it down.

The debt avalanche is the quickest way to go — make larger payments on debt with the highest interest rate, while paying the minimum on lower-rate balances. By paying down your highest-interest rate debt first, you can minimize interest costs, accelerating your debt payoff and saving money. But if you’re motivated by quick wins, choose the debt with the smallest balance to pay off first — this is the debt snowball method. The psychological impact of paying off one credit card or loan can be huge and keep you motivated to tackle the next debt in line.

Bankruptcy

Bankruptcy is typically a last-resort option, but it can also be a strategic move if you’re working to preserve your retirement or savings accounts and don’t foresee being able to pay down debt with new income. That said, it has serious credit consequences and will stay on your credit report for up to seven to 10 years depending on the type of bankruptcy you file. If you can pay off debt via debt consolidation or a debt management plan, either is probably a much better option. Consult with a bankruptcy attorney to better understand the risks, benefits, and costs of filing.

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