Answers to 5 Frequently Asked Questions About Debt Consolidation

Nadav Shemer
Answers to 5 Frequently Asked Questions About Debt Consolidation
If you’re currently deep in debt, we want you to know you’re not alone. If you want proof, just go to Reddit or Twitter and you’ll find many people in a similar position to yours. And if you want something to brighten your day, you’ll also find many people who have beaten the debt trap.

Reddit in particular is a great place for discussing your debt situation with others. Subreddits like /personalfinance have thousands of threads dedicated to budgeting, savings, and getting out of debt. In this article, we present five of the best questions posed on /personal finance in the past month – and provide our expert response.

1. Crushed by debt. Should I declare bankruptcy?

This type of question comes up again and again on Reddit.

Our response: Only consider bankruptcy after you have explored all other options

If you have large amounts of debt that you’re incapable of paying off and your creditors are threatening foreclosure or repossession of assets, then bankruptcy may be an option.

However, know that bankruptcy is a serious decision that should not be taken lightly. Yes, it will wipe out some debt obligations, but it also has serious consequences. Chapter 7 bankruptcy means the court sells your assets to pay off your debts. Chapter 13 involves a court-approved repayment plan but is only for people with too much cash or too many assets to qualify for Chapter 7.

Bankruptcy stays on your credit report for 10 years, making it extremely difficult to qualify for financing of any kind. Bankruptcy does not release you from certain debt obligations such as student loan debt, government debt, or child support and alimony.

Best Companies to Use for Debt Resolution:

The following companies are all experts at successfully resolving personal credit card debt. We selected these three for their speed and low rates – two skills that will be particularly valuable as the fast-moving coronavirus hits people’s pockets.

Freedom Debt Relief

Freedom Debt Relief has been providing debt consolidation services for over a decade, enrolling over 750,000 customers and consolidating more than $10 billion in unsecured debt. It offers a range of tools and services that make it a great option when you’re looking to end that debt problem once and for all.

Freedom Freedom Learn More

Accredited Debt Relief

Accredited Debt Relief  is a premier debt consolidation company. Based in California, this company has earned an A rating from the BBB and accreditation from both the AFCC and the San Diego Chamber of Commerce.

Accredited DR Accredited DR Learn More

LendingTree

LendingTree lets borrowers take advantage of the competition lenders to access better terms, rates. It gives customers the ability to compare offers simultaneously, empowering them to make the best decision based on their unique circumstances.

LendingTree LendingTree Learn More

If you owe more than you can afford to pay, first consider the following: 

  • Create a budget and draw a line between essential expenses (e.g. rent, food, transportation) and non-essential expenses. 
  • Get a debt consolidation loan and turn multiple monthly payments into one monthly payment with a potentially lower interest rate.
  • Get a 0% APR credit card and use it to quickly pay off small debts.
  • Use a service like Freedom Debt Relief to negotiate a debt settlement and pay back only a portion of your debt. (This damages your credit score, but the consequences are much less severe than bankruptcy).

2. I have an excellent credit score, but I'm struggling to pay off thousands of dollars in credit card debt. Should I take out a personal loan with interest or get a balance transfer credit card?

This is a great question, because the answer isn’t as clear cut as you may think.

The principle behind both options is the same. A debt consolidation loan involves transferring multiple debts into a single person loan with single monthly payment. A balance transfer credit card allows you to transfer your debts into a single credit card.

If you believe that you can pay off your debts within 1.5 years, then go for a balance transfer credit card. These cards often come with a 0% APR introductory rate for the first 15-18 months, making them great for paying off moderate amounts of credit card debt. But be warned: the APRs after the introductory card can be very high, so you’ll want to pay off the debt in quick time.

In most other circumstances, a debt consolidation loan is better. We are living in a time of low interest rates where even the average personal loan is below 10% APR. With a strong credit score, you could qualify for an APR as low as 3-5%. Services like Fiona help you compare personalized loan offers for amounts up to $100,000 and loan terms up to 7 years.

3. Should I put my money towards paying off debt or saving for a house?

This is another common question from Reddit users. The question tends to come from people who earn well but have lots of debt (ballpark $20k-$50k).

The general answer is to pay off high-interest debt first. If you have loans or credit card debt with 10% or 15% APR, then paying these off will save you more than anything you could earn investing. In these trying times, with coronavirus causing havoc to the economy and stock markets, paying off debt with 5% interest may even be preferable to investing.

Of course, the exact answer depends on individual circumstances. If your debt has a low interest rate, then it may make sense to put any extra cash into savings. At the very least, you should always aim to have at least six months of living expenses stashed away in an emergency savings fund.

4. How can I leverage debt consolidation during Covid-19 times?

The financial chaos caused by the coronavirus will sadly force many people into the debt cycle. But strangely enough, it will also present opportunities for people who keep their eyes open.

Firstly, the average personal loan rate has fallen to 9.63% (as of Feb 2020), close to an all-time low. Given the Fed’s two emergency rate cuts in response to Covid-19 in March, we expect the average rate is now actually around 9% or lower.

Secondly, credit card issuers are willing to assist, as we outlined in this recent article on credit cards and the corona crisis. Many top banks are offering programs like forbearance (postponement of payments) or a reduced interest rate. However, a word of caution: before agreeing to forbearance, be aware that interest will continue to accrue on your balance.

Thirdly, if you are in serious debt, your creditors may be willing to settle. In general, creditors are willing to settle for a smaller amount if they believe a person is incapable of paying everything back. The coronavirus crisis could potentially give consumers more bargaining power over creditors scared of losing out altogether. Debt advisors such as ClearOne Advantage can help on this front.

5. I suddenly can’t afford debt consolidation payments due to Covid-19. What do I do?

Not surprisingly, this one has come up a bit since the coronavirus hit. Most of the advice we can provide has already been covered here, but let’s sum it up again.

If you can’t afford to meet loan payments, consider:

  • Cutting non-essential expenses and putting the money saved towards your loan payments.
  • Asking your lender for a deferment. (Lenders have shown themselves willing to provide deferments during this tough period, although be aware that interest will still accrue on the balance).
  • Digging into your emergency savings fund, if you have one.
  • Using a loan comparison tool to see if you qualify for a lower APR. As we mentioned earlier, personal loan rates have fallen, so you may be able to save a little on interest. Always use a loan search tool to assess the market before applying directly to a lender. That way your credit score won’t be affected.
Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products.