Debt Relief Programs Compared
Understanding the pros and cons of different debt relief programs, to find the best solution for your needs and budget.
Debt relief programs refer to any method that helps solve debt problems when traditional monthly payments aren’t working. These are the solutions you use when you can’t afford to make your monthly payments OR when your monthly payments aren’t effective at eliminating a debt. While there are eight different programs that can provide debt relief, only four of them generally apply to credit cards. We’ll look at those first.
4 credit card debt relief programs
This type of debt relief delays or suspends the monthly payments on a specific debt for a set period of time. You basically call your loan servicer and let them know that you can’t make your payments. They agree to either reduce your payments or suspend them entirely for a period of time. That way, you have time to get back on your feet without missing debt payments, which would negatively impact your credit.
Refinancing (interest rate negotiation)
With this type of credit card debt relief, you call your creditor to negotiate a lower interest rate on your credit card. The creditor agrees to reduce the APR on your account, which reduces the accrued monthly interest charges on your balance. That means you can focus on paying off the principal (the actual debt you owe).
NOTE: When you lower the interest rate on a loan, it’s referred to as refinancing. However, when you lower the interest rate on a credit card, it’s commonly referred to as interest rate negotiation.
Debt consolidation takes multiple debts and rolls them into a single monthly payment at the lowest interest rate possible. There are several ways to do this. Debt consolidation loans take out a new loan to pay off your existing debts. Debt consolidation programs are repayment plans that you set up through a debt relief service. For credit card debt, you can consolidate multiple balances using a debt management program.
With debt settlement, you get out of debt for less than the amount you owe. You pay back a percentage of your outstanding balance, then the creditor agrees to discharge the remaining balance owed. Each debt you settle creates a negative item on your credit report that sticks around for seven years. This will decrease your credit score, but it can be a good solution for debts that are already in collections.
Which option is right for you?
- If you’re having temporary budget challenges and just can’t afford your payments for a limited time, forbearance is usually the best option.
- If you can afford your payments but feel like you’re wasting money on interest charges, try interest rate negotiation first.
- When you’re having trouble keeping up with your payments but want to avoid credit damage, consolidation is generally the best choice.
- If you don’t care about credit damage and just want a fast exit, debt settlement is often the right option to use.
Relief plans for other types of debt
This type of debt relief is similar to forbearance because it temporarily suspends the monthly payments on a debt. Payments are stopped entirely for a period of time that you agree to with the lender. In some cases, like with subsidized federal student loans, interest charges do not accrue during the deferment. In other cases, you may be responsible for paying off those interest charges once your payments start again.
Refinancing refers to the practice of reducing the interest rate on your loan. You generally take out a new loan at a lower interest rate and use the funds to pay off the existing loan. This may also provide other benefits, such as reducing your monthly payments.
This debt relief option for loans permanently changes the terms of your loan. There are several things you can change:
- Changing the loan amount to reflect the real value of a piece of property, such as a mortgage that’s upside down; that’s where you owe more than the home is actually worth.
- Moving from an adjustable interest rate to a fixed interest rate
- Changing the term of the loan, which adjusts the number of months you have to repay a loan.
- A longer term will lower your monthly payments but increase total interest charges
- A shorter term will increase your monthly payments but reduce total interest charges
Debt relief programs compared side by side
|Deferment / Forbearance||Refinancing / Interest rate negotiation||Loan Modification||Debt Consolidation||Debt Settlement|
|What does it do?||Suspend or reduce monthly payments temporarily||Reduce APR (interest rate) applied to your debt||Modify loan terms to make them more favorable||Rolls multiple debts into one payment||Eliminate debt for part of what you owe|
|Does it work for mortgages?||Forbearance only||Yes||Yes||No||Called a short sale, during the sale of the property|
|Does it work for auto loans?||Yes, although the number of deferments may be limited||Yes||Possible, but rare||Yes, if you have multiple car loans out at once||During the sale if you’re trading the vehicle in but haven’t paid the loan off|
|Does it work for credit cards?||Forbearance only, usually a reduction in payments||Yes, commonly known as interest rate negotiation||No||Yes; you can also include other unsecured debts, like medical collections||Yes|
|Does it work for student loans?||Yes||Yes, but only with a private student loan company||No||Yes, federal loans can be consolidated using government programs||Usually only applies to private student loans|
|Does it cause credit damage?||As long as you start paying again at the end of the deferment or forbearance period, no||No||No||No||Yes|
|Is there a cost to do it?||No||May be fees applied; for mortgages, you may pay additional closing costs||May be fees applied; for mortgages, you may pay additional closing costs||Fees depend on type of debt consolidation plan used||Fees typically applied for every debt settled; may have to pay taxes on unpaid amount|