Get comfortable, because debt consolidation is, first and foremost, about consolidation loans, which will take a little bit of time. You’re on this page because you have recently realized that your debt is too high, or it may start to become difficult to deal with if you don’t take some kind of action soon.
It’s important to know how consolidation has changed over the last several years, so you can better understand where it stands today, and how you can best benefit from the personal loan markets. This post may be long, but it’s simplified to be easily digestible, to cover the basics and allow our readers to come in and share with each other, which is integral part of this website.
Consolidation Loans of the Past & Present
The opportunity to consolidate high interest credit card debts into a loan with a more affordable monthly payment became increasingly difficult as a result of the recession. Prior to 2008, it was not a problem for a home owner to get cash out refinancing or take out a home equity line of credit (HELOC), to pay off higher interest credit card debts. This was a popular option, even though it meant taking unsecured credit card debts – converting those balances into secured debt – using debt consolidation. This is not always a wise decision.
If you run into a financial setback with unsecured debt, such as credit cards, you have more options, and often more time to manage the situation, than you would when unable to make payments on secured debts. There are fewer options and often less time available to you when falling behind with payments on secured debts.
It had become more difficult to consolidate high interest debt using real estate. Home values had declined for many, but are bouncing back in several areas. If you do have enough equity in your home, you may look to consolidate credit card debts by taking out a HELOC or the cash out refinance option. But you may find other alternatives to reduce your monthly payments (explained later in this guide) to be a better option than putting your home on the line – which you would be risking if you later experience financial setbacks. It would be a good idea to read through the full guide about consolidating credit card debt before committing yourself to debt consolidation that involves taking on more “house debt”.
Unsecured Debt Consolidation Loans
It seems like just yesterday we regularly had CRN members come to us seeking assistance with credit card debt loads that were frequently in excess of fifty thousand dollars. Sometimes much higher. These types of credit card debt profiles often consisted of at least one large balance credit card that was opened in order to consolidate higher interest credit card balances. By large balance, I mean $25,000 or more. Several banks offered large credit limits designed to allow you to consolidate all of your credit cards over to just one balance, and one payment. Bank of America is a good example of offering high limit and low interest balance transfer credit cards.
This was at the height of the credit fueled crack up boom that came to an abrupt halt in 2008. High limit balance transfer credit cards and signature loans were being taken out of lenders product lines even prior to that.
In 2008, with the collapse of Lehman Brothers, the credit markets froze. Not just inter bank lending between all the big banks and wall street-ers. Credit products to main street (loan products to you and me) froze up too. It took a few years for the credit card market to return to even a fraction of its former pre-approved credit card junk mail glory.
What does all this mean to the person looking to consolidate credit card debt today?
Credit card lenders just came through the highest default and charge off levels they have ever seen. As a consequence, it can be more difficult to qualify for debt consolidation loans from major banks, and even your local credit union. Larger consolidation loan amounts are just not available like they once were. If they are available to you, it’s often because you look like you don’t need one.
There are certainly some options available to consolidate credit card debt with unsecured loans. But the traditional debt consolidation loan market has changed. What used to be a loan option you would pursue from a brick and mortar bank has been replaced, in large part, by peer to peer, online lenders, and personal loan companies.
There is probably more personal loans and online lenders competing for your business today than there ever were banks offering consolidation loans and large balance credit cards you could transfer to.
What About Companies Calling Themselves Consolidators?
Many years ago, a Google search for the term “debt consolidation” would have shown the top 3 results (which are typically paid ads) to be offers for consolidation loans. But for some time now, that same search in Google, or any other search engine offering paid positions for the top listings, will most likely show credit counseling companies, a debt settlement company, or a call center selling bankruptcy alternatives. Why?
Debt relief companies started to muddy the definition of debt consolidation when they recognized the benefit to marketing themselves that way led to more people contacting them. The term debt consolidation is searched for much more often than the term debt settlement or debt management.
Why point this out to you? Mostly, as a caution for how debt settlement companies have sold their service as one easy lower monthly payment. Representing debt settlement as making one lower monthly payment sounds like consolidating credit card debt, but nothing could be further from the truth. The process for settling debts requires you to stop paying your bills on time. It is not for the faint of heart, and should be viewed as an alternative to chapter 13 bankruptcy. It is not a form of debt consolidation.
Now that you know some of the history of consolidation, and what to look out for, we move in to the actual debt consolidation loans. Consolidating debt is traditionally defined as taking out a large enough low interest loan in order to pay off all of your high interest debt – like credit card debt. You then have just one lower, more affordable, and convenient monthly payment. This is the way most people still define consolidating debt today.
If your interest rates and the balances owed on your credit cards are getting too high or too complicated for you to manage, you have multiple options. Conventional wisdom suggests you first look to consolidate your debts into one loan, but understand that it’s not “one size fits all”.
You should also know that debt consolidation loans are often not your only, or best, path to get control of your bills.
The Advantages of Consolidation Loans
There are some good reasons to consider consolidating your debt with a loan, but it’s definitely not for everyone. Generally speaking, this particular method of consolidation works best for someone who is still current with their monthly payments, has an excellent credit score, a stable and consistent income, but is caught up in high interest rate credit cards. If this isn’t you, then there’s a strong possibly that a consolidation loan could make matters worse. If this is you, then here are some of the benefits:
- DIY: Although debt consolidation service providers are everywhere, they aren’t needed, because you can absolutely do this yourself. You’re doing this to save money, so don’t pay erroneous fees that will just drag you down financially – that’s not the point.
- Credit: You are using the consolidation loan to pay off several accounts, so that should reflect positively on your credit reports and in your score once they’re paid.
- Convenience: A single monthly payment will always be more efficient and easier to manage than multiple account payments, and it allows you to be more organized.
- Savings: If you qualify for the right loan, with a lower fixed rate, you may save big money just in interest, long-term. This is usually one of the main reasons for doing debt consolidation.
- Lower Monthly Payment: This allows a little wiggle room, which could be an even bigger benefit if you use the savings to build an emergency fund, invest, or add to your retirement account.
Consolidation Loan Drawbacks and Concerns
The major caveat of a debt consolidation loan is this: The more you need the loan, the less likely you are to get it. On paper, you have to look like you don’t need the loan. What I mean by this is you need a strong income, to have paid all your bills on time, and have excellent credit to qualify for a large (usually) loan with low interest rates. If you’re already struggling to pay your bills, or have missed payments, your credit is already taking a hit, which means you may only qualify for mediocre rates or low limits. In this case, the loan may not make sense for you after doing the math, because the savings just won’t be there.
- Credit: You need excellent credit (score) to qualify for the best rates and larger credit limit needed to consolidate your debts for the best savings outcome. As far as after you’re approved, that new loan may drop your credit score temporarily for a few months, but it will go back up as timely payments are made.
- Habits: If you decide to consolidate your debts with a loan, please do yourself a favor and close most of the accounts, so you don’t end up in the same situation later. The oldest accounts are the most sacred for credit reporting, so leave those open if it makes sense.
- HELOC: If your unsecured debts are rolled into a secured loan, like a home equity loan, you’re gambling with your house, and it’s a very real risk if you’re unable to make the monthly payments.
- Math: Does the math work out in your favor? If you didn’t do the loan, how long would it take you to pay off those accounts (including the interest rate), and what would your monthly payments add up to? If you consolidated them into a loan (get a quote), how much could you save, taking all those same things into consideration PLUS the length of the loan (how long you’ll be making payments). Does it still make financial sense for you to consolidate?
NOTE: Don’t be afraid to walk away from a consolidation loan if you start the process, but begin to question the wisdom, or if the rates are not going to benefit you.
Getting Creative with Debt Consolidation
Before we get into the actual loans, let’s talk about a few creative ideas that we can incorporate that may help us pay down this loan faster or save even more money in the long-run. There’s no reason why we can’t combine a few different strategies found throughout this site, and guide, to achieve our financial goals. Let’s look at a few examples.
Generate some additional income by side hustling or selling unused or unwanted items around the house, and use that extra cash to:
- put towards your existing loan principle (with the highest rate) to save on interest.
- pay down an existing low-interest credit card balance to free up space for a balance transfer.
- pay down other balances, reducing your debt-to-income credit utilization ratios, allowing you to qualify for a debt consolidation loan.
- throw extra cash at a debt roll-up strategy, which will help you pay down debt faster and save the most money getting out of debt.
Personal Loans to Consolidate Your Debt
As mentioned above, taking out a secured loan, like a home equity loan (HELOC), puts your home at risk. A home equity loan is usually chosen for it’s convenience and low interest rates, and can be a good option for those that have a strong and stable income. However, even for those people, it’s important to realize that overspending may already be a problem for you, and even unintentional overspending can make or break it. And, don’t forget that life likes to serve up the unexpected — job loss, illness, personal loss, or other hardships, so I urge you to weigh this decision carefully.
There are some great loans to be found through peer-to-peer lending, and Lending Club is the largest in the nation. They offer loans up to $40,000, and their interest rates are competitive, although you will need a pretty excellent credit score to get your hands on them. They’re available just about everywhere in the U.S., but loans are limited to 36-60 month terms. Prosper is another peer-to-peer option, and very similar to Lending Club, but they do charge some additional fees.
Upstart is relatively new, and unique, as it caters to the college grads when it comes to peer-to-peer lending. They look at much more than just your credit report, considering your education and experience, among other things. Their APR’s are slightly higher, with loans ranging from 3k to 25k for a 3 year term (only term offered). If you need a larger loan than what these other online lenders offer, SoFi has personal loans from $5,000 to $100,000 with fixed rates of 5.95%-12.99% and you can choose 3, 5, or 7 year terms. No fees. You do have to use their AutoPay to get the lowest rate, but that’s a small price to pay when you’re saving on interest.
Personalloans.com is an easy way to apply for exactly what you want – long or short term and the loan amount. The rate will be based on the your creditworthiness, like most loans, but you will have many more options available to you through their network, including peer-to-peer, personal installment loans, and personal bank loans. This should give you a good idea of what you can qualify for, at up to $35,000.
We are not affiliated with any of the above-mentioned companies and highly recommend that you peruse their websites for details on the loan process, the fine print, fees, terms, rates, and other pertinent information before applying. Some of the best consolidation loans can easily be found online, so do your research before applying. It’s also in your best interest to know what your credit report and score say about you, so be sure to pull your reports to know what to expect.
More Debt Consolidation Resources and Tools
Debt consolidation is mostly applicable to those who can no longer maintain regular payments on one or more credit cards. The educational resources are here for you if you need some type of payment concession; a reduction of interest charges; a reduction of outstanding balances; or to confirm with certainty that bankruptcy is the right debt solution for you.
There are also free technology tools online to help you accomplish better budgeting and payment discipline.
Michael, just wanted to let you know how much I appreciate the information you provide on your Website.
I can’t even begin to tell you how much you have helped me in dealing with credit card companies. Your information is invaluable.
I have surfed many websites dealing with credit card relief, and have found yours to be the most informative… by far!
Thank you
Mark
We just received a collection notices on a ComEd final bill for one of our store rentals. We have a perfect credit report and they collection agency said they reported this to the credit agencies. I paid the bill this morning. Is there any way to have that taken off my credit report. My credit score is 799 and I’m so worried that it will drop significantly. What should I do? Should I hire any attorney to help me?
Look on your credit reports and verify that the collection is on there. If it is, post an update and lets go from there.
What is the reason for the account going so long without payment? There are sometimes good reasons to request good will removal of a negative item on your credit reports. I am never all that optimistic that good will letters will work out, but I have reason to be with utility companies.
Hi Michael I keep getting phone calls from these companies that say they can do a debt litigation or debt dismissal as part of the fair credit act and. They said it is not like debt consolidation what are your thoughts on this
You would need to be more descriptive about what they are offering for me to share any feedback. There are many types of debt relief being offered out there. Some of it is what I call debt denying, or taking an argumentative approach to the banks, money and credit systems, and often with monetary protester undertones.
Some debt elimination is counter productive. But posting more will help me to understand what you are looking at.
They said if I pay 542.50 a month they will cut my debt in half and settle my 29,000 for 12,000 and it would not be reflected on my credit score it’s called the ramsaran law group
That sounds like an attorney sponsored debt settlement program. Settling debt is a common and effective way to get out from under heavy credit card bills.
The promise that not paying credit cards in order to later settle will not be reflected in your credit score is a huge red flag though.
I am currently enrolled in a DMP but can no longer afford the payment. This month will be my first missed payment and I have dropped from the program. I would like to settle the debts with each creditor if possible. Current debt is 14.100 and the companies are Sterling Jewelers, Cap One, Springleaf Financial, and First Bankcard Mastercard. Is it possible to try to settle at this stage? Also, if I send in something each month to them ($50-100) will that stave off a lawsuit? That is what I am most afraid of. Sorry, last question, if a lawsuit initiates and they win, is wage garnishment an “automatic” or will I have a chance to make payments or settle. Thank you for your attention.
Sending in less than the minimum monthly payment generally serves no purpose, especially if your goal is to settle. It will not prevent your being sued.
People often see the best settlement results after roughly 5 months of missed payments. It would help to know how long you were enrolled in your DMP?
If you are sued, and a judgment entered, you still have options to prevent garnishment.
Who are the credit card bills with, and what are the balances remaining?
I had a judgement in 2008 for a citibank credit card for $3000 plus 6% annum interest plus fees… I was too young and dumb to know to do anything but ignore it so I didn’t go to court, etc. They’ve never come after me since the judgement. Since then, I’ve been cleaning up my credit. I want to pay the debt(preferably a settlement) but am afraid to make contact as I don’t know if then they will try to come after me once I initiate. Can I make a payment arrangement to pay back a judgement or only lump sums? Would they settle for a lesser amount and if so, what would be a reasonable amount to offer?
How collectable you look on paper could make an impact on how much to offer as settlement.
Do you have credit cards that are being kept current?
If you have other collections on your credit reports, how many are resolved, and how many remain unpaid?
Is Citibank the judgment creditor, or was it a debt buyer like Unifund that sued?
I have $43,410 debt that I would like to settle. I am a widow and have Social Security and a pension check but with the payments it barely gives me enough to pay my car payment and rent. My hardship is my husband died a few years back and I lost $1500 per month in income and I have been trying to pay the minimums on my cards and it is not getting me anywhere. On one of the credit cards for the credit union they raised my rate to 18.9 because I missed a few payments and will not lower it again. The amounts are AMEX $23K, Discover $7, Visa Argent Credit Union $3500, Comenity – $4K and personal loan with same credit union $3500.
I have signed up with a debt settlement company but am worried I might get sued. Their fees have to be paid after each settlement so that means it will be that much longer before the next one gets settled. I can get out of this agreement at any time.
I have no assets. My husband was laid off from his job when he was 50 and when he found another one he did not get a pension from then because he had not been with them long enough. He had no life insurance because of his lung problems before he died. He could not get insured.
I have not missed any payments yet. What type of settlement assistance do you offer and I would really prefer to work with someone even if I pay them but may just not as much as they are charging 25% of enrolled amount.
Thanks for any advice.
I would encourage you to call in and talk to one of the specialists about settling debts at 800-939-8357. Fees for professional negotiations can vary. But before you do that, have you looked at your options with chapter 7 bankruptcy? A no asset chapter 7 would cost less than 2 thousand dollars and be over in as little as 90 days. By comparison, debt relief through settlements is going to run closer to 20k, and take maybe a couple/few years.
What, if anything, is preventing you from using bankruptcy to get the relief you need?
Hi Michael I’m really sick about today I handled the civil suit pro se did everything in or filed the answer the interrogatories put in a sworn stamped objection the plaintiff asked for an extension which was today nov 17 I went to court for a non jury trial but I was told the judge settled the case and was handed a summary judgement I believe the judge was crooked can you please help me Michael I’m from nj I also found out just about an hour ago that this person that I worked with for 20 years is a family member of the judge which might of had something to do with it. Take care Michael and please get back to me, thanks,jimmy
I would encourage you to reach out to an experienced debt collection defense attorney in your state. Preferably one with experience in that same court. What city are you in?
What are my options to settle or negotiate a judgment already happening. My checking account was put on hold but there was barely any money to settle the debt that grew 3 times from the original in 2008.
Check out this post about settling judgments: https://consumerrecoverynetwork.com/question/can-you-settle-credit-card-judgements-like-other-debts-stressed/. There is a great deal of information through out the comments on that page too.
Dear Michael,
I’m am attempting a DeedInLue. I am told that HSBC has a lien on my Texas house for a judgement they won back in 2009. I am told to ask for the release of the judgment and to negotiate the total down to hopefully have it paid with the reimbursement from the house transaction. Do you have any advice be for I call them?
Thank you for your time.
Need more info. Is HSBC the plaintiff listed in the lawsuit that resulted in judgment? If not, who is? How much is the judgment for, and what type of account originally?
Does your credit report show you making payments to other creditors on time each month? Any other collections listed?
What is the name of the law firm that sued you?
How much are you expecting from the reimbursement?
09/05/2010
And what state do you live in? The debt may already be passed the amount of time allowed for in your state to file a legitimate collection lawsuit. When that happens it can make settling the deb with the creditor easier, and also opens up some other options to stop collection calls and letters.
What is your goal for this account?
Michigan
good day. can I ask you a question? am from the Philippines, will it apply here? thank you very much.
If you have US based debt, I can offer feedback. If you have debt and credit questions that are Philippines based (accounts originate there), I will have little to share.
If a credit card co writes off your debt as a loss, (not sold to another creditor) will they still try to collect?
Yes. Your debt remains collectable after the credit card bank charges it off (write off is another term for it). The debt never really becomes noncollectable per say. But once the time allowed to sue you legitimately is up, and the debt can no longer appear on your credit reports passes, the amount unpaid is then considered zombie debt.
How long has it been since you last paid on the account in question?
Hi,
I found a lawsuit filed against me in the court docket from Portfolio Recovery Associates. When I called them to work out payment deals, they told me I had to talk to their lawyer now. The lawyer is hard to reach…
I havent been served any papers, but would like to go ahead and take care of this. (Trying to fix my credit anyways).
All I can afford now is a payment plan. I owe $3600 (well thats the NEW balance). I can pay $300/month right now.
I am moving to a new county really soon…Should I just wait to see of they serve me? Or, should I delay this lawsuit by not coming forward? In two months, I could have enough money to pay a lump sum of 70%. I know they would never agree to wait two months unless this thing got delayed due to failure to serve.
There is a pretrial date set on the court docket, but no one has served papers. Court docket shows the summons was emailed to the plaintiff attorney and thats it.
Whats best here? Offer a 100% payoff plan now? Or see if this gets delayed long enough for me to offer a lump sum in two months?
If it were me, I would want to delay this until I had a realistic lump sum to work with when negotiating a pay off deal that resulted in the case being dropped. Payment plans with PRA in this situation will almost always mean the attorney they have working the file wanting you to sign off on a consent, or stipulation to judgment. That is not the end of the world when your goal is to pay the debt, but if your only a couple months from having a settlement amount they will be likely to accept, you can start off by defending the suit and buy that time and more. Done right, you could settle for less than that 70% target, or even win with a case dismissal. Working with a skilled consumer law attorney who regularly defends collection cases in your state courts is ideal. What is the name of a nearby city of size? I can email contact points for any attorneys in the area with experience you need. Most offer a no cost initial consult.
I had a wage garnishment recently. I am not working now but can pay about 2/3 of the balance, $5,400 due to a relative who can help me a little. However the Atty will not negotiate for a lower balance. Should I contact a lawyer or is it too small of an amount?
Who was the original creditor for the account? Is that who sued, and if not, who did? What is the name of the attorney collection firm you are trying to negotiate with? How long ago was it that the judgment was entered in the court, and when was it you were last working and had any amount garnished?
Also, are you paying other creditors on time, and if so, are they accounts that show on your credit reports?
I faxed them my Power of attorney papers today and they are supposed to call me within three days to discuss everything. Thanks
He has a Delaware mailing address but is physically in MD. The last time the house was appraised it was at 90,000 but a 45,000.00 addition was put on years ago after that. He has a home loan against the house of 40,000. The name on the deed for the house though is listed as [edit] family trust since it had been put into a trust five years ago.
I cannot say how much of a hangup that would be. I imagine the loan is on his credit report, and his reports are viewable to collectors.
Let me know what happens with that, if anything, and we go from there.
Thank you for your help. Finances are bad since just one of his medicines costs 2,000.00 every three months. Insurance doesn’t cover it all. He has kidney failure… Heart disease and diabetes and was given five years to live and that five year mark was months ago. He does have a home but there’s a 40,000.00 loan out on it and its also listed in a trust that can’t be changed because my mom made it before she passed so not sure if they would be able to try to take his house or not.
I would not bring up the house unless they do. Is he in Delaware? Do you happen to know the current estimated market value of the home?