Debt and credit

Debt Consolidation vs. Debt Relief 

What’s Better Debt Consolidation or Debt Relief?

If you have high credit card balances and any type of high-interest secured or unsecured debt, a debt consolidation agency can assist you by consolidating all accounts into one low-interest loan. You can even include your car loan in debt consolidation.

On the other hand, if you owe only unsecured debt, like medical bills, signature loans, collection accounts and credit cards, a debt relief program can combine and reduce all your debts.

Is your credit score too low to qualify for a low-interest loan?

A credit score of 700 or less won’t qualify you for a low-interest debt consolidation loan but it will qualify you for a debt relief program.

How much does a debt relief program cost?

With debt validation, you only end up paying a total of around 45% of what you owe, including all fees. Debt settlement can cut your balances by around half, including fees you end up paying only around 70% of what you owe and no interest.

The Main Difference in Debt Consolidation and Debt Relief Programs

Debt relief programs reduce the amount you owe, versus, a loan which replaces one debt for another and only lowers the interest.

Debt consolidation is a way to refinance your unsecured debt and ease your debt payment process. It can minimize the interest rate on your current loans and offer you a much longer repayment period without hurting your credit score.

The main benefit of debt consolidation

A debt consolidation program can improve your credit score, versus a debt relief program that can lower your credit score.

What accounts qualify for debt consolidation?

  • credit card bills
  • car loans
  • unsecured or secured debts

You can use your debt consolidation loan to pay off any debt you want.

Best ways consolidate debt

Usually, debt consolidation carries out through a balance transfer credit card via a debt relief and consolidation agency.

You can also get a debt consolidation loan through a bank, financial institution, and other private lenders. Credit unions are known to offer the lowest rate on debt consolidation loans.

Credit Score Above 800

The interest rate that you are given on a debt consolidation loan will depend on how high or low your credit score is. If your credit score is above 800 you could qualify for an interest rate of 5% or less, assuming you shop around and choose the right lender.

Credit Score Below 700

If your credit score is under 700 the only debt consolidation loan you will qualify for is one with a high-interest rate, often above 25%.

Before doing debt consolidation – do the math

First, add up each of your interest rates on a piece of paper. Take that total and divide it by the number of accounts you have. That is your average interest rate. Make sure to only apply for a debt consolidation loan that has an interest rate that is less than your average current rate.

You can use a debt relief calculator to figure out how much you are currently paying and compare that to what you’d pay with debt consolidation.

Any reputable debt relief company will have a debt calculator on their website where you can get an idea of what the total cost will be prior to applying. Licensed lenders are also legally required to illustrate all fees and rates associated with the loan.

Required documents for debt consolidation

  1. Income proof
  2. Driver’s license
  3. Credit report

Requirement factors for a debt relief program

  1. Over $5000 in unsecured debt (no lawsuits or judgments allowed)
  2. A credit report is used to determine eligibility
  3. Must be able to afford to pay at least 1.5% of your total debt (as the new monthly payment). For example, on $30,000 in credit card debt the minimum payment comes out to around $750 per month, so to qualify for a debt relief program you must be able to afford at least $325 per month.

Final Words

Debt consolidation makes sense if you can find a low-interest balance transfer card, home equity line of credit or a loan to pay off your high-interest accounts and if you can comfortably afford the newly proposed monthly payment on the loan. If you can barely afford minimum payments right now, you should consider debt relief programs and work towards getting a debt reduction. Whether you decide on debt relief, consolidation or settlement, first check out the company’s record at the Better Business Bureau (BBB). There you can see how long a company’s been in business and how many complaints they have listed. Also, check out reviews sites like Yelp and TrustedCompanyReviews.com, where you can check what actual clients have to say about the debt consolidation company, before applying with them.

Do you have any questions? Please ask.