If you’ve racked up thousands of dollars in credit card and medical debts over the years and now find yourself barely able to afford your minimum monthly payments, you’re probably desperate to find a way out of your predicament. It should be clear by now that you’re not going to be able to take on your creditors by yourself.
With hundreds of debt relief providers to choose from, all of which seem to take a slightly different approach to reducing or eliminating their clients’ debts, it’s hard to know who to trust. As you look for the best company to call when you have a big debt problem, you’ll want to keep these important facts about debt relief in mind.
There are almost as many debt relief strategies as there are organizations who offer them. For instance, you’ve probably seen slickly-produced commercials for debt consolidation loan providers that claim to be able to save you thousands of dollars on your outstanding debts with a one-size-fits-all loan. That sounds like a tempting offer, but what’s the catch?
Debt consolidation loans are large enough to cover the balances on all of your disparate credit card, medical, and unsecured personal loan bills. In theory, they replace each of these obligations with a single monthly payment at a fixed rate of interest, saving you the confusion and expense of dealing with multiple creditors.
In practice, debt consolidation loans are unlikely to save you time or money. Rather than reduce your total debt burden, they simply roll your existing debt over into a new obligation. If you have $10,000 in outstanding debts at an average interest rate of 20 percent, paying them off with a $10,000 debt consolidation loan at 15 percent interest will save you just $500 during the year after its issue.
Although 15 percent sounds like a steep rate for a loan supposedly meant to refinance your high-interest debts, you’re unlikely to find a better deal on aif you’ve carried a balance on your loans or missed monthly payments in the past. Current loan rates for borrowers with mediocre credit begin at around 14 percent and climb to 20 percent, depending on the issuer and the borrower’s exact credit score.
If your credit is downright awful, your debt consolidation loan might carry an interest rate as high as 25 percent. In this case, your new loan would drop an extra $500 per year on top of your already-crushing debt burden. With the same amount of debt and a still-high interest rate, debt consolidation loans can take years or even decades to pay off, doing little to get you back on the road to solvency.
If the best company to call when you have a big debt problem isn’t a debt consolidation loan specialist, what is it? Unlike many fly-by-night consolidation loan providers, debt settlement companies promise a clear-cut path out of debt in a reasonable time frame. Debt consolidation through settlement is a straightforward process: Your debt relief expert negotiates with each of your creditors on your behalf, eventually reaching a settlement that both parties can live with. You won’t have to field angry calls or continue to make payments on your outstanding balances during this time.
This process is repeated until each of your debts has been settled, usually within two to four years. At this point, you’ll need to make a single lump-sum payment to cover your remaining loan balances, which may have been reduced by 50 percent or more during settlement negotiations. The best part: Once your payment has cleared, you can walk away debt-free.
Debt settlement does affect your credit score for a year or two after you’ve paid off your loans, during which time it may be difficult to secure a loan or open a new line of credit. This sounds uncomfortable, but consider the alternative: a bankruptcy filing that will destroy your credit and may impact your ability to borrow money for up to a decade.
Your choice should be clear: The best company to call when you have a big debt problem is one that specializes in debt consolidation through settlement, not a consolidation loan provider.