Compare Your Debt Help Options
The Bottom Line: Sometimes a solution to a problem is so evident that it’s staring you in the eyes. Other times, finding it is like trying to drive in a whiteout. If you are struggling to find the right debt help option that fits your financial situation, it is easy to be confused. Being methodical is a good idea. Focus on mixing and matching your debt level, risk preference, credit score, and employment situation with available debt solutions. In order to help you find the best debt help solution the BBB is featuring an innovative tool, the Debt Navigator, to help guide you to financial freedom.
Which is the best way to pay down debt?
There is no “best way” to pay off debt. The best debt help option depends on your financial situation.
- Have good credit, or bad credit?
- Have assets that you can sell, or a house with equity?
- Want to lower your monthly payments or pay off the debt as quickly as possible?
- Know what happens if you can’t afford your monthly payments?
For the extreme cases, bankruptcy may be the best option; however, that requires a serious financial hardship, the bankruptcy laws are quite stringent, and it may require you to liquidate assets you wish to keep .
Although each individual’s situation is unique, you can find the best solution by learning about:
- Five different debt help options
- Eight points to analyze your situation
- One way to find debt help options appropriate to your situation.
Five Different Debt Help Options
Before you figure out how to choose the best debt help option, here is a brief description of five options:
- DIY payment plan: This is disciplined payment plan to make fixed and/or accelerated payments to pay off your debt. Two popular ways to pay off debt quickly are the snowball and avalanche methods.
- Personal Loan: A personal loan is an installment loan with fixed payments, no collateral, and only a personal guarantee. These loans are given, over a short-term period, generally 3-5 years. Interest rates vary, but can be very attractive for those with excellent credit.
- Cash-out Refinance: A cash-out refinance mortgage allows a homeowner with a mortgage, and enough equity in their home, to pay off their current mortgage and take out additional funds to consolidate debt. The cash-out refi offers the lowest interest rate, for qualifying borrowers with excellent credit. However, it stretches out your payments and transfers unsecured debt to secured debt. If you don’t already have a mortgage or don’t want to redo your first mortgage because of its low interest rate, then consider a Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC).
- Credit Counseling and Debt Management Plan (DMP): A credit-counseling plan aids you in analyzing your financial situation and creating a budget. This is very helpful for people who have sufficient income to make their payments, but need help organizing their finances. The DMP consolidates your credit card payments into one payment and in some cases negotiates lower interest rates.
- Debt Settlement: A debt settlement program negotiates reduced balance payoffs with your creditors. It is appropriate if you are struggling to make your monthly payments, or about to reach that point, and have a legitimate financial hardship. In the program, you make a monthly payment into a bank account under your control. After a settlement is negotiated and you approve it, the debt settlement company transfers money to the creditor. Debt settlement hurts your credit, as you choose to stop making monthly payments to the creditors, and it doesn’t prevent creditors from making collection calls. Never work with a firm that charges up-front fees.
Eight Points to Analyze Your Situation
In order to find the debt help option appropriate for your personal financial situation, you need to analyze your financial situation. Here are eight points to consider before choosing a debt help option:
- Amount of money you owe: Calculate the amount of money you owe on unsecured debt.
- Your payment and financial stress level: How stressed out are you when it comes to making your monthly payments? You can rank yourself between: No stress (you make your payments on time without any problems), low stress, some stress, mild stress, moderate stress, or high stress (your debt is overwhelming and can’t make minimum payments)
- Employment situation: Are you self-employed, full-time, part-time, retiree, or unemployed?
- Amount of income: Calculate your annual gross income. Is it regular?
- Do you own a home?: If so, then what is your home worth, how much do you owe on your mortgage(s), what is your home worth, is the home your primary residence?
- Rate your credit score: Do you have excellent, good, fair, or poor credit?
- Total amount you can allocate per month to debt payments?: How much money do you have available to use toward all of your unsecured debt payments?
- What are your debt preferences (to get debt free): Consider how important it is to you to hurt your credit, pay off debt in the shortest time, make the lowest overall costs, lower your monthly payment, or have the least stress and risk of legal issues.
One Way to Find Debt Help Options
Figuring out the best way to pay off debt is not simple.
For some people there is more than one option. If for example, you have good credit and lots of equity in a home then you could choose between a DIY program, personal loan, or cash out refinance.
However, for most people trying to sort out the pros and cons is not easy. The BBB is pleased to present to you a unique tool, the Debt Navigator that helps you analyze your situation and presents the debt help options that best fit your situation. You will receive personalized recommendations including real numbers to explore the options, their pros and cons.