Debt consolidation loans vs. debt consolidation programs: Which is better?
As inflation sends the prices of consumer goods and services higher, the Federal Reserve's response to that inflation has pushed interest rates up. That's a painful reality for many who carry balances on credit cards and other debts. After all, credit card minimum payments tend to rise alongside interest rates. And, when you have to find a way to squeeze higher prices for goods and services into your budget, it can be difficult to make extra room for higher payments too.
So, you may be looking into your debt relief options.
Debt consolidation loans and debt consolidation programs are two popular options to consider. And while their names suggest they're the same thing, there are distinct differences to consider before you choose one over the other. So, which is better for you? That's what we will break down below.
Compare your debt relief options to find the best solution now.
Debt consolidation loans vs. debt consolidation programs: Which is better?
Here's a quick rundown of the differences between debt consolidation programs and debt consolidation loans:
- Debt consolidation programs: When you enroll in a debt consolidation program, the service provider will work with your lenders to reduce your interest rates and improve your payment terms. You'll send one monthly payment to your provider and the company you work with will send individual payments to your credit card companies on your behalf until you've paid your debts off.
- Debt consolidation loans: Debt consolidation loans are a type of loan that's designed to pay off high interest rate debt. These loans presumably have a lower interest rate than you're currently paying. And, they simplify the payment process by consolidating multiple credit card payments into one monthly loan payment.
So, which is better?
Neither of these options is going to be perfect for everyone who comes across it. There are times when debt consolidation programs are better and times when debt consolidation loans are better.
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When debt consolidation programs are better
Debt consolidation programs are typically better than debt consolidation loans when you're having a hard time making your minimum payments or you don't have a good credit score. If you're dealing with financial hardship, your service provider may use your hardship information to negotiate a better deal on your behalf. And, since debt consolidation programs don't involve new loans, you won't need a good credit score to qualify for the best options.
Keep in mind that debt consolidation programs may require the closure of credit cards involved in the program. So, if you have available credit on those cards, closing them can affect your credit utilization ratio, which could have a negative impact on your credit score. The good news is that this damage to your credit may be short term as your credit score should improve with successful payments as you progress through a debt consolidation program.
When debt consolidation loans are better
Debt consolidation loans may be your better option if you're not having a hard time making your credit card payments and you have a strong credit score, but you don't expect to pay your credit card debt off anytime soon. After all, since debt consolidation loans are a lending product, the best interest rates and terms are typically only available to those with a strong credit score.
But, if you do have good credit, you may qualify for a lower debt consolidation loan interest rate than the interest rates you currently pay on your credit cards. That lower interest rate could save you time and money in the process of paying your debts off.
The bottom line
There's no one size fits all solution to credit card debt. Debt consolidation loans and programs are both effective ways to eliminate high interest debt. But, each option works better under different circumstances.
If you're having a hard time making your credit card minimum payments or you don't have a strong credit score, a debt consolidation program may be the better way to get the relief you need. If you do have a strong credit score and simply want a better interest rate and easier payoff process, a debt consolidation loan could be your better option.
In either case, get in touch with a debt relief expert now to start putting high interest debt behind you.
