What Are Debt Relief Loans?

Managing debt can feel overwhelming—especially if you’re juggling multiple payments. Add in some debts with high interest rates, and your situation could feel hopeless. But it’s not. Debt relief loans could throw you a potential lifeline by consolidating your debt into a single, manageable payment. 

What exactly are debt relief loans, and how could they help you regain control of your finances? In this guide, we’ll explore different types of debt relief loans, walk you through the alternatives for those with bad credit, and share some tips on how to choose the best option for your financial situation.

What is a debt relief loan?

A debt relief loan is a way to finance existing debt. It combines high-interest debts, like credit cards and personal loans, into a single loan. Instead of several payments, you could now make one monthly payment on this new loan. A debt relief loan could help simplify debt management because it consolidates your debts. It could reduce your monthly payments and possibly lower your interest rate, which could help you save on interest. 

Eligibility Criteria 

Debt relief loans are usually for those with a stable income and a qualifying credit score. Some lenders may help those with lower credit scores—but those options may also come with higher interest rates.

Benefits of a Debt Relief Loan 

A debt relief loan could simplify your finances. It combines multiple debts into one monthly payment. A single payment is generally easier to manage than tracking multiple bills with different due dates. A debt relief loan could give you more time to pay. It simplifies budgeting and reduces the risk of missed payments. Also, if your debt relief loan has a lower interest rate than your existing debts, you could save money over time. Debt consolidation could improve your credit utilization ratio, which might help boost your credit score.

Types of Debt Relief Loans

How can you get a loan that accomplishes any or all of those debt consolidation goals? You may be able to choose among several options.

Personal debt consolidation loans

A personal loan can replace multiple, higher-interest accounts with a single, lower-interest loan and provide a definite end date to your debt. Personal loan terms range from one year to 12 years or longer. Typically, personal loan interest rates are higher for longer terms. The longer you stretch out repayment, the more interest you’ll pay. Choose the shortest term that you can afford month after month.

This may be an excellent way to reduce your interest rate if you have a lot of credit card debt. According to Federal Reserve data, the average credit card interest rate in 2023 was about 22.5%. In contrast, the average personal loan rate (24 month term) was about 12.1%. 

Your actual interest rate depends on your credit rating and current financial situation. If your credit scores have fallen recently, you may not be able to get a better interest rate. But if you’ve improved your credit rating, you might be able to save a lot by consolidating debt with a personal loan. 

Understand that even if a personal loan has a lower interest rate, its payments may be higher than your total credit card minimums. That’s because credit cards are designed to keep you in debt for decades while you have to pay personal loans off within a few years.

Balance transfer credit cards

Another option if you have credit card debt is to move it onto a balance transfer credit card. Transferring multiple balances to one card makes them easier to manage and gets you a period in which more of your payment goes toward paying down your balances.

Balance transfer credit cards feature an introductory interest rate that can be as low as 0%for a period of up to 23 months. That gives you a break from paying interest during that period and allows you to put more money towards reducing your balance. The trick is to pay down as much of your debt as possible while you have that break.

Three things to pay attention to when choosing a balance transfer credit card are:

• The balance transfer interest rate -- the lower, the better

• The initial period over which the balance transfer rate applies- - the longer, the better

• Any balance transfer fees -- these should be as low as possible because they cut into your interest savings

Home equity loans

If you have equity in your home, borrowing against that equity can be a way to get a relatively low-interest loan to replace higher-interest debt. 

As with any debt consolidation loan, consider fees when determining how cost-effective this is. 

Also, remember that a home equity loan is a mortgage secured by your home. Without a solid plan for repaying the loan, you risk losing your house.

Cash-out refinance mortgages

Similar to home equity loans, a cash-out refinance mortgage lets you borrow against the equity in your home to replace higher-interest debt with a lower-rate loan.

The difference is that a cash-out refinance loan also replaces your existing mortgage. So, this alternative only really makes sense if you can lower the interest rate on your current mortgage and require a relatively large amount of cash.

There are extra mortgage charges for a cash-out option, and those fees apply to the entire loan – not just the cash-out. If you want $20,000 in cash, your total loan is $250,000, and your cash-out fees are 2% (not uncommon), it would cost you $5,000 in fees to borrow $20,000. 

As with a home equity loan, this debt consolidation approach puts your property on the line. Before taking this approach, be sure you can keep up with payments.

Are There Government Debt Relief Loans?

You may have heard about such things as government debt relief loans. Generally speaking, this isn’t accurate, though the government does offer some types of debt assistance.

For example, if you owe money on your taxes, you may be able to work out an installment payment plan with the IRS. 

Also, there are various programs to help you pay student loans, such as temporary payment forbearance, debt forgiveness under certain circumstances, and income-driven repayment plans.

There is one government debt relief loan – the Federal Direct Consolidation Loan. You may be eligible to consolidate specific federal student loans into one loan with no application fees. It also may be easier to get one of these than other types of loans if you have a limited credit history.

However, replacing government-backed student loans with a debt consolidation loan can cause unintended consequences. Student loan forgiveness and income-driven repayment are off the table once you refinance.

Tips for choosing the right debt relief loan

Choosing the right debt relief loan requires some thinking and some pencil-and-paper calculating. It’s a good idea to make sure the loan lines up with your financial goals. Here are five tips to help you make an informed decision:

1. Assess your debt. Start by adding up the total amount of debt you need to consolidate. Knowing this figure will help you work out the loan amount you need. It will also show if a debt relief loan is your best option.

2. Compare interest rates. Look for a loan with a lower rate than your current debts. A lower rate could save you money over time and make your monthly payments more affordable.

3. Check the loan terms. Pay attention to the loan’s repayment terms, including the length of the loan and any associated fees. Shorter terms may have higher monthly payments, but they save you money in interest over time. Longer terms could mean lower monthly payments, but they’ll likely cost more in the long run.

4. Find out your credit score. Your credit score plays a big part in the interest rate and terms you’ll be offered. If your score is low, you may want to improve it before you apply for a loan. 

5. Look at the lender’s reputation. Check out a few potential lenders to see if they’re reputable. Are the terms transparent, so you can compare them with other lenders? Read reviews and check the BBB to help avoid scams and predatory lending.

Debt relief loan alternatives

It can be challenging to get any loan if you have bad credit. If you cannot qualify for an affordable debt relief loan, consider one of the options below. 

Debt management plan (DMP)

A debt management plan won’t reduce what you owe. Instead, a debt management company works with creditors on your behalf to make repaying your debt easier. Having bad credit won’t keep you from being accepted into a DMP. 

Debt management counselors may negotiate lower interest rates, reduced monthly payments, and penalty waivers. This service may involve additional costs like debt management fees. You should consider those costs and decide whether they are worth it to have a professional create a pathway out of debt for you.

Debt settlement

Debt settlement also involves negotiating with your creditors, but it may be a much tougher sell. 

Debt settlement means convincing your creditors to accept less than the total you owe as payment in full. A creditor isn’t obligated to settle with you, but may if you can demonstrate that repaying the entire debt is not possible. 

You will probably owe taxes on any amount that your creditors write off. Debt settlement can impact your credit scores for years to come. That may not matter if your credit is already bad. And it may be easier to re-establish a good credit score if you reduce your debt load.

>>Check out Freedom Debt Relief reviews on YouTube

Bankruptcy

Bankruptcy is a legal process in which a court decides how much of your debt you can pay and how much your creditors must write off.

The advantage of bankruptcy is that your creditors have to participate and abide by the judge’s decision. The disadvantage is that filing is public and that you also must abide by the judge’s decision.

With Chapter 7, you may have to part with possessions you want to keep. With Chapter 13, you could be forced to make high payments into a plan for years. Bankruptcy stays on your credit report for seven to ten years and usually does more damage than debt settlement.

Find Your Best Debt Relief Option Now

The thing about debt relief is that the sooner you address it, the more options you have. As debt accumulates and your credit rating deteriorates, you have fewer options.

If you can get it, a debt relief loan is less drastic than some of the other alternatives described in this article. Step One is to review all the options and decide which is best for your situation.