What is the Cheapest Way to Consolidate Debt?

Find Out the Debt Consolidation Pros and Cons of Different Methods

Sep 15, 2009 Asa Ghaffar

Tired of making payments on credit cards, loans and medical bills? Discover the cheapest way to consolidate debt.

The cheapest way to consolidate debt will vary considerably from person to person. The first step in this important decision-making process is to identify the various ways of achieving affordability. Options include a debt settlement program, Debt Management Plan or a debt consolidation loan.

The Cheapest Way to Consolidate Debt

The debt consolidation pros and cons of each method will depend heavily upon credit score, how much is owed and the amount of disposable income available at month end. This is why it is important to perform a careful assessment of personal circumstances prior to proceeding with any debt reduction strategy.

An Adverse Credit History

A poor credit score is likely to make an unsecured debt consolidation loan an expensive option. Whilst the loan could be secured against the family home, it is important to think carefully before turning unsecured debt (credit cards, medical bills etc) into secured debt.

Individuals with a poor credit history are likely to find that a debt settlement program or Debt Management Plan provides the cheapest way to consolidate debt. This is because FICO scores have already plummeted. An opportunity exists to determine repayment based on the basis of affordability and/or write-off up to 50% of the amount owed.

Level of Personal Debt

Owing upwards of $25,000 is likely to mean that an unsecured debt consolidation loan is not possible. This is the maximum that is available from peer-to-peer lender, Prosper loans. This is simply due to the risk posed to the lender as no collateral is available in the event of the borrower defaulting.

A secured loan could be a possibility, provided that sufficient equity is available. The provision of security will mean that a lower rate of interest is also offered by the lender. It also means that a larger sum of money can be borrowed pay-off or reduce credit card debt and medical bills.

Although it will affect credit scores, it may be better to sign-up to the best fixed-rate mortgage deal now and then proceed with a debt settlement program. Avoid borrowing any money and any bad credit will no longer show after a period of 7 years.

This sacrifice will help to avoid risking the family home. It will also mean that up to 50% of unsecured debt can be written-off at an affordable rate. However, whilst likely to be the cheapest way to consolidate debt, it is unlikely to be the right choice for those working in the legal or financial sector where good credit is essential.

Disposable Income

It is important to establish how much it is necessary to contribute each month in order to comply with the agreement, particularly if working with a limited budget. This may rule out one or more of the options. If disposable income is severely limited, a Debt Management Plan is normally most affordable.

Whilst a Debt Management Plan is often the cheapest way to consolidate debt on a month-to-month basis, it can take a while to clear all of the money owed. However, most lenders are prepared to freeze interest and stop any further charges.

The cheapest way to consolidate debt isn't always obvious. However, it is possible to determine the debt consolidation pros and cons through a close examination of personal circumstances. Always talk to a qualified debt counselor before proceeding.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional before proceeding.

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