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What You Need to Know About Wage Garnishment

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Updated – December 6, 2018

Wage garnishment is a legal process that allows creditors to deduct money from a borrower’s paycheck to collect their unpaid debt. It is usually a lender’s last resort after other debt collection methods such as letters and phone calls are unsuccessful. With wage garnishment, you are forced to repay outstanding bills, back taxes or unpaid student loans out of your paycheck whether you want to or not.

While this collection method may seem unfair, it can take quite a while for your debts to fall so far into default that a creditor seeks a judgment against you and begins garnishing your wages. For the most part, wage garnishment only happens when you refuse to deal with your debts and do not take steps to prevent wage garnishment before it starts.

If you’re worried about having your wages forcibly garnished, it’s crucial to know how you can prevent this debt recovery tactic. But it’s also important to understand wage garnishment limitations, as well as the legal processes involved.

How wage garnishment works

While nearly any debt can result in wage garnishment, creditors of some types more commonly use the method. These include:

  • Federal student loans
  • Unsecured consumer debts
  • Federal taxes
  • Unpaid child support

But it’s important to note that wage garnishment doesn’t happen overnight — and there are limits to how much of your wages can be garnished. Here are the main steps involved in most wage garnishment cases.

Step 1: You default on a debt, whether that’s unsecured credit card debt, taxes owed to the federal government or child support you owe on a regular basis.

Step 2: Depending on the debt you have, you will likely receive letters and phone calls about your delinquent debt.

Step 3: A debt collector decides to sue you. If they win, the court could award a judgment against you or allow you time to appeal.

Step 4: If you don’t appeal or you lose your appeal, the debt collector can be granted a court order that allows them to garnish your wages.

Step 6: The creditor works directly with your employer to garnish your wages to the full extent of the law. The funds you owe will be deducted from your paycheck before you receive it until your debt is paid off.

What are the limits of wage garnishment?

The federal Consumer Credit Protection Act sets limits on the amount of money that debt collectors can collect from your wages and implements several more rules that protect consumers from some of the consequences of wage garnishment.

Employment. For starters, your employer cannot fire you for having your wages garnished the first time. But this rule doesn’t protect you against losing your job if your wages are garnished for a second time or beyond that.

Percentage limits. The law also sets the standard for how much of your wages can be garnished. In most cases, this is based on your disposable earnings, defined as the amount of money you have left after legally required deductions are covered. These deductions include federal and state taxes, payments for Social Security, Medicare and unemployment insurance taxes, and contributions to state employee retirement systems required by law. Deductions often paid through payroll such as health insurance premiums, union dues and charitable contributions are not deducted from earnings when calculating disposable earnings.

Once disposable earnings are calculated, the Consumer Credit Protection Act limits the amount of earnings that may be garnished in any workweek or pay period to 25% of your disposable earnings or the total of your disposable earnings above 30 times the federal minimum hourly wage — whichever is less.

The federal minimum hourly wage is $7.25 an hour, and 30 times that amount is $217.50. This means that individuals who earn less than $217.50 a week are not subject to wage garnishment in most cases.

It’s important to understand that this section of the law does not apply to unpaid child or spousal support or back taxes. We’ll go over limits and rules for those two categories in the sections below.

How wage garnishment occurs

If you’re behind on your debts and could face wage garnishment in the future, the next steps depend a lot on the type of debt you have.

Credit card debt and other unsecured debts

When consumers get behind on their credit card bills and other unsecured debts, a long and drawn-out process usually takes place before wage garnishment is even considered.

The process usually unfolds in the following manner:

1. You stop making payments on your bills. Once your bills are late, you will begin receiving late notices in the mail as companies try to collect from you.

2. Once your debt is 180 days in default, the creditor will either hire a debt collection agency to collect on its behalf or sell the debt altogether to minimize its losses. The debt collector will also try to collect from you by calling you on the phone and sending you letters.

3. The creditor may decide to file a lawsuit against you in your state’s civil court.

4. If you don’t appear in court or you do appear and lose the case, the debt collector will receive a judgment against you that says you owe a set amount to the creditor. This judgment is a formal decision by the court that confirms you owe the creditor a set amount of money.

5. The creditor has the right to enforce that judgment by contacting your employer and beginning a garnishment of your wages.

Most people who owe credit card debt have gone through a long and stressful collections process before the creditor files a lawsuit and pursues wage garnishment, according to consumer protection lawyer Jay S. Fleischman. Because of that, far too many people don’t appear in court.

Fleischman said this is part of the reason that wage garnishment for credit card debt and other unsecured debts is so common. It’s easy for creditors to win when debtors don’t show up to defend themselves.

When it comes to limits on wage garnishment for unsecured debts, the Consumer Credit Protection Act applies. This means that, for any given week of work, your wages can be garnished by the lesser of:

  • 25% of your disposable earnings
  • Any income that exceeds 30 times the federal minimum wage

But it’s important to note that some states do not allow wage garnishment for unsecured debts. Texas, Pennsylvania, North Carolina and South Carolina only allow wage garnishment for taxes, child support, federal student loans, and court-ordered fines and restitution.

Federal student loans

Wage garnishment to repay federal student loans is also common. This is mostly because the U.S. Department of Education has a mechanism in place that starts wage garnishment without a court order, Fleischman said. You must be given a 30-day advance notice of an opportunity for a hearing, but other than that, the process is automatic.

While your federal student loans become delinquent as soon as you miss a payment, your loan falls into default once it has been delinquent for at least 270 days. At this point, you will become ineligible for federal student aid and your default will be reported to the three credit reporting agencies. You could also be prohibited from buying and selling real estate, and you could be taken to court and charged collection costs and other fees.

Once in default, you will receive a letter from the Department of Education that gives you 30 days to resolve the default or begin repaying your loan. You can also request a hearing to explain why you shouldn’t be subject to an administrative wage garnishment.

If you do want to get your federal student loans out of default, you may be able to do so via a process known as loan rehabilitation. Under this agreement, you must contact your loan servicer and agree to make at least nine affordable, consecutive payments within 20 days of their due date over a 10-month period. Once you have met the terms of the agreement, your loans are no longer in default.

If you don’t respond or begin repaying your loan within 30 days, your wages will be garnished, with the same limits as unsecured debts.

Federal taxes

If you’re behind on taxes, the IRS also has rules in place that garnish your wages. But you will receive the following notices in the mail before wage garnishment and other legal processes begin:

  • A notice and demand for payment
  • A notice of intent to garnish your wages
  • A notice of your right to a hearing

If you opt to ask for a hearing, you can dispute your back taxes or ask the IRS for a payment plan. Fortunately, the IRS does offer short-term and long-term repayment plans that can help you catch up on your taxes while avoiding wage garnishment.

If you don’t pay the taxes you owe or make payment arrangements with the IRS, your wages will be garnished. The amount of wages it can collect from your paycheck depends on your filing status and how many dependents you have. Either way, wage garnishment limits are very high.

As an example, if you are single, have no dependents and get paid $600 a week, the IRS can take $369.23 of your paycheck each week until your tax debt is paid off.

Child and spousal support

You don’t want to fall behind on child and spousal support. Federal law allows much higher limits for wage garnishment in these categories.

For back child or spousal support, the Consumer Credit Protection Act allows garnishment of up to 50% of someone’s disposable earnings if they have remarried or have another child who is not part of the court order. If they do not fall into that category, garnishment can reach up to 60% of the person’s disposable earnings. Another 5% of disposable earnings can be garnished if support payments are more than 12 weeks behind.

But keep in mind that some states set lower limits on wage garnishment for child and spousal support.

Like many types of debt, wage garnishment for spousal and child support is determined by court order. The claimant will need to file a case with family court in their state to receive a judgment. Once the judgment is handed down, wage garnishment is set up through the employer.

How to get out of wage garnishment

When it comes to getting out of wage garnishment, an ounce of prevention is worth a pound of cure. In other words, you’re a lot better off figuring out a way to repay your debts from the start.

Plus, most of the avenues to get around wage garnishment are not quite ethical. For example, New York-based debt resolution attorney Leslie Tayne said you have the option to switch jobs or cut your work hours so that you earn so little that wage garnishment doesn’t apply. You could also quit working altogether to halt wage garnishment. Wage garnishment only works if you’re an employee receiving a W-2, she said.

Of course, Tayne said these are poor solutions when it comes to overcoming wage garnishment. Not only will you continue owing the debts in question, but you will suffer financially as well.

Another way to get out of wage garnishment is to try to resolve the debt with the creditor directly, Tayne said. Pick up the phone and call your creditors to see if a payment plan can be worked out. If it can, then you’re wise to stick with the plan and pay off your debts over time. Of course, this strategy works best if you negotiate your debts shortly after you default instead of later in the process.

You can also file bankruptcy to stop wage garnishment — at least for a while. When you file for bankruptcy, an automatic stay comes into effect that prevents most creditors from being able to continue involuntary collections activities against you. Depending on the type of bankruptcy you file, you may be able to discharge your debts completely or reorganize your debts and pay them off over time.

Living with wage garnishment

If you’re facing wage garnishment and are worried about the impact to your take-home pay, keep in mind that wage garnishment won’t last forever.

You might need to find ways to supplement your income, Tayne said. It’s possible you could pick up more hours at work to make up for your loss in pay, for example. You could also pick up a part-time job or a side hustle to make ends meet.

Having your wage garnished might also be a sign to approach your finances in a different way. Instead of trying to avoid bills and liabilities, you could try to focus on finding ways to pay them, Fleischman said. And don’t forget that you could make a huge difference in your finances by cutting your expenses. The less you owe in regular bills each month, the more money you’ll have to live on. You could try cutting your cable television package, finding a cheaper apartment or cooking at home instead of dining out.

Wage garnishment is far from convenient and you might even see it as unfair, but it’s something you may have to endure — at least until your debt is paid off.

“Sometimes you just have to live with it,” Tayne said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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7 Best Personal Loans that Accept Cosigners

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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When you need to borrow money but don’t want to deal with the uncertainty of credit cards, a personal loan is a smart option to consider.

Not only do personal loans come with fixed interest rates, but they also come with fixed monthly payments and a fixed repayment period. With a fixed payment, you’ll never end up with a monthly bill that’s higher than you thought it would be. A fixed repayment timeline also lets you know exactly when your loan will be paid off.

If you’re on the fence about borrowing money, keep in mind that there are many reasons why a personal loan may be a viable option for you. Perhaps you want to consolidate high interest debt with a new loan that features a lower interest rate and better terms. Maybe you need to remodel your kitchen or fix your car that has been broken down for months. Whatever the reason, a personal loan offers a predictable way to borrow money without any surprises.

But what do you do if you can’t get a personal loan on your own? A cosigner could help you qualify for funds. Here’s what you should consider before applying with a cosigner, plus personal loans that accept cosigners.

When should you find a personal loan cosigner?

While personal loans offer a smart way to borrow money, not everyone can qualify. Lenders consider your income, employment status, debt-to-income ratio and your credit score before they approve you, which could be a problem if your finances aren’t in the best shape.

If you don’t have the time to improve your credit score before applying for a loan, a personal loan cosigner can help your application. A cosigner agrees to guarantee the loan if you stop making payments. A cosigner could be a family member or a close friend, but it needs to be someone with good credit for them to help you qualify for a loan.

Here are the pros and cons of getting a cosigner for your personal loan:

Pros

  • Qualify for a loan when you may otherwise not have been able to
  • Get better terms on your personal loan
  • Can use the loan to build your credit
  • Have someone to hold you accountable, if you’re new to debt

Cons

  • Your cosigner’s credit report could take a hit if you miss payments
  • If you stop making payments, your cosigner will be equally responsible
  • Can strain your relationship if you’re not on top of your loan

Don’t mistake a cosigner for a co-borrower

Before you apply for a personal loan with a cosigner, it’s also important to note the difference between a cosigner and a co-borrower. Where a cosigner lends their good credit to your loan application and guarantees to repay your loan if you do not, a co-borrower is someone who shares in your obligation to repay money you borrow.

If you plan to take out a personal loan with your spouse and you each plan to make payments toward the loan, for example, your spouse would act as a co-borrower and not a cosigner. With that being said, it’s possible you could benefit from having a co-borrower or a cosigner provided the other individual has good credit and the financial means to repay the loan.

7 best personal loans that accept cosigners

A cosigner can help you qualify for a loan you may not be able to get on your own. Fortunately, there are a handful of companies that readily accept loans with more than one applicant or a cosigner who is willing to guarantee the loan.

To help you find the best loan options within this category, we compared lenders based on their interest rates, loan terms, borrowing limits and credit requirements. Here are some of the top personal loans you can get with a cosigner or a joint applicant.

Company
APR
Terms
Min Loan Amount
Max Loan Amount

3.34% - 16.99%

24 to 144

months

$5,000

$100,000

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on LendingTree’s secure website

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Your APR may differ based on loan purpose, amount, term, and your credit profile. Rate is quoted with AutoPay discount, which is only available when you select AutoPay prior to loan funding. Rates under the invoicing option are 0.50% higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 3.34% APR with a term of 3 years would result in 36 monthly payments of $292.31.

6.95% - 35.89%

36 or 60

months

$1,000

$40,000

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on LendingTree’s secure website

Our Commitment We'll receive a referral fee if you click here. This does not impact our rankings or recommendations.
Backed Personal Loans

2.90% - 15.99%

12 to 36

months

$3,000

$25,000

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on Backed Personal Loans’s secure website

16.05% - 35.99%

24 to 60

months

$1,500

$30,000

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on LendingTree’s secure website

Advertiser Disclosure.

Loan approval and actual loan terms depend on your ability to meet our standard credit criteria (including credit history, income and debts) and the availability of collateral. Loan amounts subject to state specific minimum or maximum size restrictions. Collateral offered must meet our criteria. Active duty military, their spouse or dependents covered by the Military Lending Act may not pledge any vehicle as collateral. CA minimum loan amount is $3,000. GA minimum loan amount is $1,500 for present customers and $3,100 for others.

5.99% - 29.99%

24 to 60

months

$7,500

$40,000

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on LendingTree’s secure website

All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details.

36.00%

12 to 60

months

$1,000

$25,000

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on LendingTree’s secure website

SoFi

6.99% - 14.99%

36 to 84

months

$5,000

$50,000

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on LendingTree’s secure website

Advertiser Disclosure.

Fixed rates from 6.99% APR to 14.99% APR (with AutoPay). Variable rates from 6.26% APR to 14.10% APR (with AutoPay). SoFi rate ranges are current as of November 30, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.26% APR assumes current 1-month LIBOR rate of 2.33% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.

See Consumer Licenses.

SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

1. LightStream

LightStream is a popular online lender that offers personal loans for almost any reason. Their personal loans come with a fixed interest rate, a fixed monthly payment and a fixed repayment timeline that dictates exactly when your loan will be paid off from Day One.

Although LightStream doesn’t list a minimum credit score requirement, they do note that their loans are available for consumers with “good credit.” LightStream also allows people to apply for their loans with a joint applicant. The best part is, LightStream personal loans come with no fees — no origination fee, no application fee and no prepayment penalties for paying off your loan early.

LightStream personal loans may be best for:

  • Individuals who have “good credit” or a FICO score of 660 or higher
  • Individuals who have a co-borrower whose credit score is 660 or higher
  • Anyone who needs to borrow a lot since LightStream personal loans have a higher borrowing limit than some of their competitors

2. LendingClub

LendingClub is another loan company that allows joint applicants to apply for personal loans. Unlike other lenders on this list, however, LendingClub is a peer-to-peer lender that gets its funds from other individuals who agree to invest in the platform.

LendingClub lets consumers borrow up to $40,000 for debt consolidation, home repairs, emergency expenses and many other purposes. Interest rates can be on the low side provided you have good or great credit since the lender’s lowest advertised rates start at 6.95%. However, LendingClub does offer personal loans to borrowers with credit scores as low as 600.

LendingClub also considers applicants with a maximum debt-to-income ratio of 40%, meaning that your monthly debt obligations cannot make up more than 40% of your monthly gross income.

LendingClub personal loans may be best for:

  • Borrowers with fair credit who may not be able to qualify for a loan with other lenders
  • Anyone who needs to borrow less than $40,000 with a joint borrower
  • People who want to borrow from individual investors rather than a traditional bank

3. Backed Personal Loans

Backed Personal Loans is a lender that is actually geared to consumers who need a cosigner to get a personal loan. This company refers to cosigners as “backers,” however, per the company name.

Backed offers special protections for individuals who agree to cosign on their loans. Unlike traditional personal loans that inform cosigners of a default after the fact, Backers personal loans offer the borrower and cosigner a 15-day grace period to keep a loan in good standing once a payment is late. Late fees aren’t charged during this time, and the late payment won’t be reported to credit bureaus until the 15-day period has lapsed. Plus, the cosigner is informed of the late payment right away.

Backers personal loans do charge an origination fee that can be decreased substantially if you fill out your application with additional information and add a qualified cosigner. Backed requires a minimum credit score of 660, and it does exclude borrowers who have recent derogatory marks on their credit reports. Currently, Backed personal loans are only available for individuals who reside in the following states: New York, New Jersey, Florida, Arkansas, Arizona and West Virginia.

Backed personal loans may be best for:

  • Individuals who need a cosigner for their loan
  • Borrowers who need a personal loan with poor credit
  • Anyone who wants their cosigner to have the added protection of a 15-day grace period before a payment is reported late

4. OneMain Financial

OneMain Financial is a personal loan company that offers higher interest rates than some of their competitors. However, OneMain does extend personal loans to borrowers with “fair credit” who may not be able to get a loan elsewhere.

Loan amounts are offered between $1,500 and $30,000 and repayment terms are available for up to five years. OneMain Financial also allows borrowers to apply for a loan with a cosigner, which could help you qualify for a lower interest rate if your credit is poor. It’s important to note, however, that will you will have to visit a physical OneMain Financial branch to close on your loan.

OneMain Financial personal loans may be best for:

  • Individuals who need a cosigner for their loan
  • People with fair credit who may not qualify for a personal loan with another lender
  • Anyone who needs to borrow up to $30,000 and pay it back for up to five years

5. FreedomPlus

FreedomPlus is another personal loan company that focus on borrowers with less-than-stellar credit. Loan amounts are offered up to $40,000 and you can repay for up to five years. FreedomPlus does charge an origination fee from 0.00% - 5.00% of your loan amount, but they don’t charge any penalties if you pay your loan off early.

While FreedomPlus doesn’t list an exact minimum credit score to qualify, they do list a maximum debt-to-income ratio of 40%. FreedomPlus also allows co-borrowers on their loan applications, which can make it easier to qualify if you do not have the income or credit to qualify on your own.

FreedomPlus personal loans may be best for:

  • Individuals with fair credit who have a co-borrower to apply with
  • Anyone who needs to borrow up to $40,000 for nearly any reason
  • Someone who can’t qualify for a personal loan without any fees

6. Mariner Finance

Mariner Finance is another personal loan company that allows individuals to apply for a personal loan with a cosigner. This company does offer interest rates as high as 36.00% depending on your creditworthiness, but they do not list a minimum credit score to qualify. For that reason, Mariner Finance may be a good option for consumers who may need to pay a higher interest rate due to credit mistakes they’ve made in the past.

While Mariner Finance does have looser requirements to qualify for their loans, it’s important to note that they only operate in 22 states: Alabama, Delaware, Florida, Georgia, Indiana, Illinois, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and Wisconsin. Fees can vary on personal loans from Mariner Finance as well, so make sure to read the fine print and understand all fees before you move forward with one of their loan options.

Mariner Finance personal loans may be best for:

  • Individuals who need a cosigner for their personal loan
  • Anyone with less-than-stellar credit who can’t get a loan with another company
  • People who need to borrow up to $25,000; however, note that loans greater than $7,000 or less than $1,500 need to be funded at a physical branch

7. SoFi

While SoFi is mostly known for their private student loans and student loan refinancing options, this company also offers personal loans. SoFi personal loans are available for people in every state except for Mississippi, and they allow co-borrowers on the same loan application.

One big benefit of personal loans from SoFi is their lack of fees. This company doesn’t charge an origination fee for their personal loans, nor do they charge prepayment fees or late fees. SoFi even has a program that allows you to pause your loan payments if you lose your job. The best part is, SoFi makes it possible to see if you could get approved for a loan without a hard inquiry on your credit report.

SoFi personal loans may be best for:

  • People with good credit who want to apply with a co-borrower
  • Anyone who needs to borrow a lot since personal loans amounts go up to $50,000
  • People who want a personal loan without any fees

Conclusion

If you need a personal loan with a cosigner or a co-borrower, make sure to check out all the companies on this list. While we included some lenders that charge higher interest rates and fees, our list of top lenders for personal loans with a cosigners was created to include options that could work for borrowers with all credit ratings and financial situations.

As you compare loan options, make sure to read the fine print and compare loan terms, interest rates and fees. With enough research, you’ll have the best shot at finding a personal loan that meets your needs — with or without a cosigner.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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What Credit Score Do I Need for a Personal Loan?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

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Most people know their credit score is a three-digit number that represents their credit health, but that doesn’t mean they know how their credit score is determined or why it’s so important. Many consumers also fail to realize they have some power over their credit scores, including the ability to improve their score time.

If you’re wondering about the credit score needed for a personal loan, it’s crucial to understand the inner workings of your credit score and how it might impact your ability to qualify for the cash you need.

In this guide, we offer up information on the minimum credit score required for a personal loan, along with additional details on credit scores and where you can get yours for free.

What is a credit score?

While the term “credit score” is used widely to describe the score you’re assigned based on your creditworthiness, there are several different types of credit scores available. The most popular credit score is the FICO Score, which was created by the Fair Isaac Corporation. This score, measured on a scale from 300 to 850, is used by 90% of lenders who are making credit-related decisions each year, according to FICO.

VantageScore is the biggest competitor to FICO and its most current version, V3, uses the same 300-850 range of scores to describe consumer creditworthiness. Other credit scores include TransRisk, Experian’s National Equivalency Score, CreditXpert Credit Score, CE Credit Score, and Insurance Score.

While each type of credit score works differently, they all consider a similar set of information to determine where you stand. The big differences between them are based on how much weight they give each factor they compare.

As an example, the FICO scoring model uses the following criteria to determine your credit score:

  • Payment history: 35%
  • Debts/amounts owed: 30%
  • Age of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

With Vantage Score, on the other hand, different factors play a larger role in the score you’re assigned. Look how Vantage Score is determined, and you’ll see what we mean:

6 factors in your VantageScore

Factor

Weight

Age and type of credit

Extreme

Credit utilization (amounts owed)

Extreme

Payment history

High

Total balances

Medium

Recent behavior

Low

Available credit

Extremely low

If you don’t know your credit score but want to find out what it is right now, you can get your free credit score using My LendingTree. The services help you monitor your credit and find ways to improve it.

Some credit cards, like the Discover it® Cash Back, provide a free FICO® score on your monthly statement as a cardholder perk. You can also get your FICO® score for free with a service called Credit Scorecard. This service is available to you whether you are a Discover customer or not.

How do banks use credit scores?

When you apply for a personal loan, your lender will pull one of your credit scores from at least one of the credit reporting agencies — Experian, Equifax, or TransUnion. At that point, they will take a close look at your score to determine your creditworthiness.

“Credit scores are used to determine the risk of doing business with an applicant,” said credit expert John Ulzheimer. “If your score or scores are good enough and you have a sufficient income, then you’re likely to be approved.”

Keep in mind, however, that your credit score is only one factor a lender will consider when deciding whether to approve you for a personal loan.

“Banks also look at your entire credit report, your debt-to-income ratio (DTI), employment history, any items you own that can be used as collateral, and so on,” said Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.

In summary, you will likely need to have more than a sufficient credit score for a personal loan if you hope to qualify. You will also need to have a proof of income and employment, an acceptable debt-to-income ratio (a DTI below 35 percent is a good goal to shoot for), and a solid credit history that shows you have used credit responsibly in the past.

What credit score is needed for a personal loan?

When it comes to minimum credit score requirements for personal loans, there is no hard and fast rule. According to myFICO.com, a credit score of 670 or above is generally considered “good” and acceptable. This means that an applicant who applies for a personal loan with a score of 670 may qualify, but they may or may not receive the best interest rate or terms.

But that doesn’t mean a consumer with a credit score of 620 can’t get a loan, said Harzog; “it just means that the interest rate will be high.”

That’s because, generally speaking, those with low credit scores usually pay much higher interest rates if they can qualify for a loan. However, the opposite is also true since a high credit score will usually get you a loan with the lowest interest rates and best terms.

How much will your interest rate vary based on your credit score? That depends on your lender, where you live, and other factors. For example, at Wells Fargo, a $5,000 personal loan with a repayment period of sixty months offers the following rates based on a calculator they offer on their website as of November 14, 2018:

  • Excellent credit (score of 760 or above): 11.49% to 13.74%
  • Good credit (score of 700 to 759): 11.49% to 18.49%
  • Fair credit (score of 621 to 699): 18.49% to 24.49%
  • Poor credit (score of 620 or below): 19.99% to 24.49%

In terms of transparency, not all lenders offer the type of detail Wells Fargo does with their loan payment calculator. While some lenders list their credit score requirements online, others remain vague or refuse to commit to a minimum credit score cutoff altogether.

For example, Goldman Sachs Bank USA lists that only consumers with “excellent credit” qualify for their personal loans with the lowest rates, but they don’t list a minimum credit score requirement or explain their minimum cutoff for a great credit score. On the other hand, student loan refinance company and personal loan lender Earnest lists directly on their website a minimum credit score requirement of 680.

If you’d like to explore personal loan options, you can use this tool from LendingTree to see offers from up to five different lenders. You’ll input information about yourself and what you want out of a loan. If you qualify, the tool with spit out lender offers you can review.

As you begin comparing lenders for a personal loan, it’s important to keep in mind that credit score requirements, interest rates and transparency about internal processes will vary greatly. Ulzheimer also said that requirements also vary by lender since some “target a higher risk population.”

“For some lenders, a 580 may be good enough,” he said. “It’s not uniform.” (You can see personal loans for bad credit here.)

What can you do if your credit score is too low for a loan?

If you can’t qualify for the personal loan you want, it’s crucial to be aware of some of the risks that come with personal loan alternatives. Payday loans and title loans may make it easy to access cash, but they do so at an exorbitant cost. Interest rates on payday loans can surge up to 780% when you factor in fees, and title loans can lead to you having your car repossessed if you don’t pay them back in full when they’re due.

Consequently, it’s smart to avoid borrowing money unless you absolutely must.

“If you’re in a position where you need to rebuild your credit, it’s not a good idea to take on more debt,” said Harzog. “Instead, you should take some steps to improve your credit score over time, such as paying down debt to decrease your utilization, making sure all your bills are paid early or on time, and refraining from opening or closing accounts while you try to boost your score.

Harzog also noted that you should check your credit report for free with all three credit reporting agencies on AnnualCreditReport.com. If you find a negative note on your report that is inaccurate and take the time to dispute it, this could help your credit score tremendously.

In lieu of taking the time to improve your credit score before you apply for a loan, here are a few additional options to consider:

  • Get quotes from bad credit lenders. While lenders who focus on people with bad credit should be an option of last resort, you can consider them. Just remember that you may pay an extremely high interest rate if your credit is poor. With NetCredit Personal Loans, for example, your APR could be as high as 179.00%.
  • Get a cosigner. If you’re able to convince a family member or trusted friend with great credit to cosign on your loan, you could have a better chance at qualifying with a lower interest rate.
  • Apply for a secured loan. Secured loans require you to put down collateral, but they tend to offer lower rates and may be easier to qualify for. If you have home equity you can borrow against, a car that is paid off, or a retirement account with a healthy balance, for example, you may be able to take out a secured loan.
  • Borrow from family and friends. If a lender won’t give you the time of day or you want to avoid high interest rates, you can also try borrowing money from family or friends. Just make sure you have the means to pay your loan back — if you default and blow them off, you risk jeopardizing your relationship.
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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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The Ultimate Guide to Bankruptcy – Chapter 7 & 13

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

bankruptcy guide
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During the peak of the financial crisis that started in 2007, bankruptcy was considerably more common than it is today. During the 12-month period that ended in September 2010, a shocking number of bankruptcies — 1.6 million — were filed.

In the year that ended March 31, 2018, annual bankruptcy filings totaled 779,828. That’s a 1.8 percent drop from the year prior, noting an ongoing decline in bankruptcies since 2010.

Fewer bankruptcies is good news for consumers and the economy, but not everyone is so lucky. Due to financial issues such as job loss, divorce, and chronic overspending, many consumers still opt for bankruptcy as a solution to their money problems.

This guide was created to help explain the different types of bankruptcy, how the process works and the type of consumer who would benefit most from the debt resolution that bankruptcy provides. If you’re considering bankruptcy to get your finances back on track, keep reading to learn more.

What is bankruptcy?

Bankruptcy is a process that helps consumers liquidate assets to pay off their debts when they can no longer manage them on their own. The process is outlined in Article 1, Section 8 of the U.S. Constitution. The Bankruptcy Code, which was enacted by Congress in 1978, is the uniform federal law that governs all bankruptcy cases in the U.S.

Besides consumer bankruptcy, bankruptcy laws also protect businesses that are struggling financially. The types of bankruptcy available to consumers, Chapter 7 and Chapter 13, help debtors resolve delinquent debts and shore up their finances, although they work in different ways.

While bankruptcy can result in the loss of personal property and assets through liquidation, it is often the best choice for consumers:

  • After a Chapter 7 bankruptcy, consumers are often able to enjoy a fresh start that is free from unsecured debts that previously plagued their finances.
  • After a Chapter 13 bankruptcy, consumers are typically able to begin repaying a percentage of what they owe and get back on track financially.

When should you file for bankruptcy?

While many consumers struggle to pay unsecured debts, bankruptcy is a solution intended for the most extreme cases — cases where families cannot get out of debt any other way. If a debtor has the financial means to repay their debts and gain a fresh start on their own, bankruptcy attorneys would likely counsel them on other options, such as meeting with a credit counselor and starting a debt management plan.

Yet there are plenty of cases when bankruptcy is the best option despite its consequences. For the most part, it makes sense to file for bankruptcy under the following circumstances:

  • You cannot pay down your debt on your own and you continue falling further and further behind. “It makes sense to file bankruptcy when you can no longer keep up with your bills,” said Leslie H. Tayne, a debt resolution attorney and founder of Tayne Law Group, based in Melville, N.Y. “If commercial creditors are breathing down your neck or if you are in danger of losing your home, it may then make sense to file bankruptcy.”
  • You have no real property and want to discharge your debts. While Chapter 13 bankruptcy requires you to reorganize your debts and pay them off, Chapter 7 bankruptcy allows you to discharge debts completely. For that reason, bankruptcy attorney Barry J. Roy of Rabinowitz, Lubetkin & Tully LLC in Livingston, N.J., said Chapter 7 makes sense when you don’t have many assets but desire to discharge your unsecured debts.
  • You are struggling with unsecured debts and don’t want to lose your home. Roy said Chapter 13 makes sense for consumers who need some help with their debts but have considerable equity in their homes they want to protect.

According to Kim Cole, community engagement manager at credit counseling agency Navicore Solutions, bankruptcy can make sense when life circumstances cause people’s finances to spiral out of control. Very often, she said, her company works with consumers who have racked up insurmountable amounts of medical debt that they couldn’t pay off if they tried. Other times, bankruptcy is the result of job loss or another unintended loss of income.

Insurmountable amounts of credit card debt can also be helped with bankruptcy, particularly when the consumer has so much debt that they cannot keep up with the payments and keep a roof over their head.

On the flip side, there are plenty of times it doesn’t make sense to file bankruptcy. For example:

  • Your debt doesn’t qualify for bankruptcy. Not all types of debt qualify for bankruptcy, which is why it’s not a solution for everyone. Cole said her company receives many inquiries about student loan debt because many people don’t realize student loan debt is not dischargeable in bankruptcy. Other types of debt that do not qualify for bankruptcy include alimony, child support, most taxes and debts resulting from fraud.
  • You have too many assets. Chapter 7 bankruptcy has a means test you must pass to qualify. If you earn too much, you may not be eligible. Chapter 13 bankruptcy also has a limit on the amount of assets you can have to qualify.
  • You can afford to pay down your debts. Cole said some families are better off with a debt management plan and credit counseling, provided they have the financial means to repay debt on their own.
  • The root cause of your debts hasn’t been settled.Florida consumer protection lawyer Donald E. Petersen said consumers should not file bankruptcy until the root cause of their financial distress is solved. “If a consumer has severe health problems and is incurring medical bills that they are unable to pay, do not file bankruptcy until after the course of treatment is complete,” he said. “Similarly, consumers who are unable to pay their bills because they are unemployed or underemployed should not file bankruptcy until their employment status has stabilized at compensation that they can live on without accumulating additional debts in order to meet ordinary living expenses.”

Chapter 7 vs. Chapter 13: What’s the difference?

The two most common types of bankruptcy — Chapter 7 and Chapter 13 — work differently to help consumers recover from too much debt. The charts below outline how each process works and why these two types of bankruptcy are geared at different consumers:

Chapter 7 Chapter 13

Length of process

If you filed for Chapter 7 bankruptcy today, your meeting of creditors would be filed in three to four weeks. At this meeting, you will meet with your trustee.

“You can’t get your discharge until 60 days after that meeting,” Roy said. For that reason, Chapter 7 bankruptcy typically takes three to six months.

Chapter 13 bankruptcy is more complicated than Chapter 7 bankruptcy since it requires you to restructure your debts. This type of bankruptcy requires you to make a court-approved repayment plan to show how you will pay off your debt within the next three to five years.

Fees

With Chapter 7 bankruptcy, the courts levy several charges — a $245 case filing fee, a $75 miscellaneous administrative fee and a $15 trustee surcharge. You will also have to cover the costs of court-required credit counseling before and after you file, which will cost $50 to $100 per session.

Finally, you will likely need to hire an attorney to oversee your case. Attorney fees for Chapter 7 bankruptcy can vary widely depending on where you live, but can range from $800 to $5,000.

With Chapter 13 bankruptcy, the courts levy several charges — a $235 case filing fee and a $75 miscellaneous administrative fee. You will also have to cover the costs of court-required credit counseling before and after you file, which will cost $50 to $100 per session.

Since Chapter 13 bankruptcy is more complex and takes longer, attorney fees may be on the higher end of the scale (up to $5,000 and potentially more).

Types of debt forgiven

When you file for Chapter 7 bankruptcy, you have what is called “pre-filing debt” and “post-filing debt.” Pre-filing debt is debt you racked up before you filed for bankruptcy, whereas post-filing debt is debt you racked up since you filed. With Chapter 7 bankruptcy, only eligible pre-filing debt can be included.

Debts that can be included in a Chapter 7 bankruptcy are of the unsecured kind, meaning they are not secured with collateral. Debts that can qualify include but are not limited to:

  • Credit card debt, including late fees and interest charges

  • Accounts in collections

  • Medical bills

  • Personal loans

  • Utility bills that are past due

  • Auto accident claims that aren’t a result of drunken driving

  • Money owed under lease agreements, including past-due rent

  • Civil court judgments, provided they are not the result of fraud


Chapter 13 bankruptcy allows you to restructure your debts and catch up on late payments for secured assets. With that in mind, some of the debts that can be forgiven may only be partially forgiven through the Chapter 13 bankruptcy process.

Debts that can qualify for Chapter 13 bankruptcy include but are not limited to:

  • Credit card debt, including late fees and interest charges

  • Accounts in collections

  • Medical bills

  • Personal loans

  • Utility bills that are past due

  • Auto accident claims that aren’t a result of drunken driving

  • Money owed under lease agreements, including past-due rent

  • Civil court judgments provided they are not the result of fraud

  • Debts incurred through a property settlement agreement in divorce or separation proceedings

  • Outstanding debts from a prior bankruptcy if the court denied your discharge

  • Loans against a retirement account

  • Homeowners association or condominium fees


Eligibility requirements

To qualify for Chapter 7 bankruptcy, you must have little disposable income. A means test is applied that compares your income to the median income in your state. If your average monthly income for the six-month period leading up to your bankruptcy filing is less than the median income for the same household size in your state, you automatically qualify.

If your income is above the median, an additional means test is applied that deducts specific monthly expenses from your average monthly income over the previous six months. If you can prove you have little to no disposable income after repaying your debts, you may qualify for Chapter 7 bankruptcy.

To be eligible for Chapter 13 bankruptcy, you must reside in or own property in the U.S., have a regular income and have unsecured debts of less than $394,725. You must also have secured debts of less than $1,184,200.

Individuals are ineligible for Chapter 13 bankruptcy if, in the 180 days prior, the debtor had a bankruptcy case dismissed by the court. You must also receive credit counseling from an approved credit counseling agency within 180 days before filing Chapter 13 bankruptcy.

Credit impact

Roy said Chapter 7 bankruptcy is the “absolute worst thing you can do to your credit score.” But he also notes that if your debts are considerable enough and your income is so low that you cannot keep up, it could still be the best option for you.

Also note that a Chapter 7 bankruptcy will stay on your credit report for 10 years. Chapter 7 bankruptcy could also lower your credit score significantly (up to 200 points) at first.

Chapter 13 bankruptcy stays on your credit report for seven years. You may also see your credit score drop up to 200 points once you file.

Roy notes that Chapter 13 bankruptcy is also catastrophic for your credit score, but that you may be able to rebuild credit quickly with smart financial management.


What happens to your assets

Each state has a set of exemptions that apply in Chapter 7 bankruptcy. This set of exemptions and limits determines which assets you can keep once your bankruptcy has been completed.

These exemptions vary by state but typically let you keep a certain amount of personal property, automobiles up to certain limits and some level of equity in your home.

Your remaining assets will be sold as part of the Chapter 7 bankruptcy process. The monies raised will be used to satisfy part of your debt with your creditors.

With Chapter 13 bankruptcy, you are able to keep all your property. But you will need to restructure your debts and make payments toward some of the amounts you owe.

Chapter 13 bankruptcy also allows you to “exempt” some of your personal property, such as some of the equity you have in your home. But you will typically wind up paying an amount toward your debts that is equal to your nonexempt assets.

This process may allow you to discharge some debts while also staying in your home.

What happens to your debts

With Chapter 7 bankruptcy, most of your unsecured debts will be forgiven and discharged. But note that many debts — such as student loans, child support or alimony — do not qualify.

With Chapter 13 bankruptcy, your debts are restructured and a payment plan is conceived. The payment plan may offer some relief of your debts, meaning you may not have to pay back 100% of what you owe.

Which type of bankruptcy is right for me?

Both types of bankruptcy can be helpful for consumers struggling with debt, but the eligibility requirements for Chapter 7 bankruptcy make it so you will likely need to file Chapter 13 bankruptcy if your income is too high or you have significant assets.

With that in mind, here are some examples of when each type of bankruptcy might be best.

Chapter 7 may be best if …

  • Your income is low enough to qualify. Roy said that if someone has modest or low earnings and significant credit card debt they can never pay off, Chapter 7 bankruptcy can make sense. “It depends on their financial situation, income and debts,” he said.
  • You do not have significant assets or equity to protect. “People file Chapter 7 bankruptcy because they have no real property and want to discharge their debts,” Roy said.

– Click here to learn everything you need to know about Chapter 7 Bankruptcy

Chapter 13 may be best if …

  • You have significant assets you want to keep. “You’re going to file a Chapter 13 if you have equity in real or personal property you want to keep,” Roy said. “Usually people file Chapter 13 because they want to continue living in their own home.”
  • You have enough income to repay some or all of your debts. Because Chapter 13 restructures most of your debts instead of discharging them, you need adequate income to be able to repay some of your debts.

– Click here to learn everything you need to know about Chapter 13 Bankruptcy

How to file Chapter 7 bankruptcy

If you decide Chapter 7 bankruptcy is your best option, here are the steps you’ll take along the way.

Step 1: Gather all bills and financial information.

You’ll need documentation of your debts, your tax returns and your monthly bills before you move on to the next step.

Step 2: Receive mandatory credit counseling.

If you are a candidate for Chapter 7 bankruptcy, you will need to complete mandatory pre-filing credit counseling with an approved credit counseling agency. During this step, a credit counselor will go over your income, debts and regular bills to determine your best options, including alternatives to bankruptcy. The cost of this type of credit counseling session is typically $50 to $100.

Step 3: You will need to meet with a bankruptcy attorney.

Tayne recommends doing some research on attorney options ahead of time, including reading reviews and meeting with more than one to find the best one for you. Once you meet with an attorney, they will go over your financial information and debts and advise you on your next best steps.

Step 4: File for bankruptcy with your attorney.

Once you have completed credit counseling, you can start your bankruptcy case with your attorney. This involves filing a packet of forms with the local bankruptcy court. Required forms include the bankruptcy petition, forms for your financial information, a list of your income and expenses, and proof you have passed the Chapter 7 means test. You will also list your property exemptions based on limits in your state.

With Chapter 7 bankruptcy, you need to pay several charges upfront — a $245 case filing fee, a $75 miscellaneous administrative fee and a $15 trustee surcharge. You will also need to negotiate attorney fees and payment, which can vary widely depending on your unique case details and where you live.

Once you have taken this step to file for bankruptcy and your case is ongoing, creditors can no longer take collections actions against you.

Step 5: Your trustee works on your behalf.

Once your Chapter 7 bankruptcy is underway, a trustee takes over your case and begins reviewing your paperwork.

Step 6: You will have a meeting of creditors, also called a “341 meeting.”

After you begin the initial bankruptcy proceedings, you’ll receive a notice from the court about your meeting of creditors. You will need to be present at this meeting to answer questions from the trustee and any creditors who may be present at the meeting.

Step 7: You are determined eligible for Chapter 7 bankruptcy.

If the trustee deems you are eligible for Chapter 7 bankruptcy, you can move forward with Chapter 7 bankruptcy protection. If you are deemed ineligible for Chapter 7 bankruptcy due to your income or income-to-expenses ratio, you may have the option to file for Chapter 13 bankruptcy instead.

Step 8: Your trustee deals with nonexempt property, and you must also deal with secured debts.

If you have assets or property that is above the exempted amounts in your state, the trustee is charged with deciding which assets to seize and sell. Monies resulting from the sale of this property will be used by the trustee to satisfy some of your creditors.

If you have debts backed by collateral — such as an auto loan that is secured by a car — you must give it back, pay the creditor what it’s worth or reaffirm the debt. Reaffirming your debts is a process where you agree that you still owe an amount after your bankruptcy case is over.

Step 9: Take a credit counseling course.

Once your Chapter 7 bankruptcy case has been filed (but not discharged), you must complete a second credit counseling education course. This course may cost $50 to $100.

Step 10: Bankruptcy is over.

Once you file for Chapter 7 bankruptcy, it can take three to six months to receive your discharge. Your bankruptcy case will be closed now.

How to file Chapter 13 bankruptcy

Step 1: Gather all bills and financial information.

Pull together a packet of documentation that includes information on all your debts, your tax returns and your monthly bills.

Step 2: Receive mandatory credit counseling.

If you are a candidate for Chapter 13 bankruptcy, you will need to complete mandatory pre-filing credit counseling with an approved credit counseling agency. The cost of this type of credit counseling session is typically $50 to $100. During this meeting, a credit counselor will go over your finances, including your debts and your income, to counsel you on your options.

Step 3: You will need to meet with a bankruptcy attorney.

Conduct some research on attorneys ahead of time. Read reviews online and consider meeting with more than one attorney in your area. Your bankruptcy attorney will help put together the forms required to file Chapter 13. This includes a bankruptcy petition, debt and income schedules, and a Chapter 13 repayment plan you have worked on with your attorney to create.

You will also need to pay several court fees at this time, including a $235 case filing fee and a $75 miscellaneous administrative fee. Attorney fees are additional and may vary. Since Chapter 13 bankruptcy is so complex, it can cost up to $5,000 or more for attorney assistance.

Step 4: Get matched to a court-appointed trustee.

Your bankruptcy trustee will oversee your case and review your debt repayment plan. They will also collect payments on this plan once it’s underway, along with distributing funds to your creditors.

Step 5: Receive an automatic stay.

Once your bankruptcy is underway, an automatic stay will be in effect. This process stops creditors from pursuing collections actions against you.

Step 6: Begin your repayment plan.

Begin making monthly payments on your debt repayment plan within a month after you file for Chapter 13 bankruptcy.

Step 7: Attend a meeting of creditors.

You will receive notice about your meeting of creditors (or “341 hearing”) around a month after you file for bankruptcy. During this meeting, your trustee and any creditors that are represented will ask you questions about your income, your debts, and your monthly expenses.

Step 8: Attend a confirmation hearing for your bankruptcy.

Either you, your attorney or both of you will need to attend a court confirmation hearing. During this hearing, any objections from creditors or your trustee will be mentioned. Ideally, you will leave your confirmation hearing with your debt repayment plan and bankruptcy confirmed.

Step 9: File proofs of claim or object them.

During the Chapter 13 bankruptcy process, your creditors file proofs of claim that list debts owed with the goal of getting paid. You can either object proofs of claim that may be inaccurate or file proofs of claim so that you can pay a debt as part of your case.

Step 10: Begin debt repayment and meet with a credit counselor again.

Once your Chapter 13 bankruptcy is underway, you will make debt payments to your trustee according to your plan. You will also need to complete your second meeting with a credit counseling agency at an average cost of $50 to $100.

Step 11: Your bankruptcy case ends.

Most Chapter 13 bankruptcy cases take three to five years from start to finish. During that time, you will continue making debt payments until your plan is complete. At that time, the court will grant a discharge of your Chapter 13 bankruptcy.

Life after bankruptcy: 3 tips to recover

Bankruptcy may be a drastic solution to debt and income issues, but it is often the only way for consumers to get a fresh start. Roy implores you to consider what bankruptcy could mean to someone who is truly struggling.

“If you walked in here and told me you had $60,000 in credit card debt and you were only making minimum payments half the time and only make $20,000 per year, there’s no way you’re ever going to be able to pay off that debt,” he said.

The best thing you can do is file bankruptcy and discharge your debts so you can get a fresh start. “Otherwise, you’re just going to linger in credit card debt hell for years,” he said. “Better off to bite the bullet and file for bankruptcy so you can move on.”

Still, that “moving on” part can be difficult for consumers. Here are some tips that can help you recover from bankruptcy and get on better financial footing:

1. Listen closely to advice offered in your credit counseling sessions.

When you meet with a credit counselor before and after you file bankruptcy, you will receive counseling on how to improve your finances in the future. Take these lessons to heart and find ways to lower your expenses so that you are less likely to get in financial trouble in the future.

2. Strive to build a lifestyle without credit or debt.

Try to build a lifestyle that is less reliant on credit and debt. Believe it or not, many card issuers will grant you a credit card within months after your bankruptcy is discharged. It is up to you to fight off the temptation to borrow so that you can avoid getting back into debt.

3. Start using a monthly budget.

Try writing down all your monthly bills and expenses and estimating variable categories, such as food and entertainment. Set limits on how much you can spend and make sure you’re designating some of your monthly income toward savings and investments. Building up a reasonable emergency fund can also help you avoid debt in the future.

Frequently asked questions (FAQs)

These frequently asked questions and answers can help you learn more about filing Chapter 7 and Chapter 13 bankruptcy.

Filing for Chapter 7 or Chapter 13 bankruptcy can cause immediate damage to your credit score, often resulting in a loss of up to 200 points. But your credit score may have already been damaged due to late payments and other financial issues leading up to your bankruptcy filing.

Chapter 7 bankruptcy stays on your credit report for up to 10 years, while Chapter 13 bankruptcy stays on your credit report for up to seven years. Both types of bankruptcy will cause damage to your credit score.

Chapter 13 bankruptcy requires a $235 case filing fee and a $75 miscellaneous administrative fee, plus attorney costs. Chapter 7 bankruptcy comes with a $245 case filing fee, a $75 miscellaneous administrative fee and a $15 trustee charge, as well as attorney charges. With both types of bankruptcy, you are also required to pay for two credit counseling sessions that cost $50 to $100 each.

Both Chapter 7 and Chapter 13 bankruptcy can allow you to keep your house if requirements are satisfied. Chapter 13 bankruptcy is especially popular with homeowners who have considerably equity since it allows them to stay in their home and continue making payments while they pay off all, or a portion of, their other debts through a repayment plan..

Both Chapter 7 and Chapter 13 bankruptcy require you to go through credit counseling before and after you file. These sessions cost between $50 and $100 depending on the credit counseling agency with which you work, and they are mandatory.

You must reside in or own property in the U.S., have a regular income and have unsecured debts of less than $394,725 to qualify for Chapter 13 bankruptcy. You must also have secured debts of less than $1,184,200. You must not have had a bankruptcy case dismissed in court for 180 days before filing.

If your average monthly income for the six-month period leading up to your bankruptcy filing is less than the median income for the same-size household in your state, you automatically qualify. If your income is above the median, you must pass an additional means test that compares your income to specific monthly expenses to prove you have little to no disposable income.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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The Ultimate Guide to Debt Management Plans

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If you’re tired of struggling with debt and not making any real progress toward paying it down, you may want to consider debt management plans. These plans, which are typically administered by nonprofit third-party credit counseling agencies, can help you create a road map out of debt while lowering interest charges and fees.

To get the ball rolling on a debt management plan, explore and compare nonprofit credit counseling agencies that offer them. Once you settle on an agency you want to work with, you will sit down with a credit counselor (or chat online or on the phone) to go over your financial details and your debts, one by one.

One of the benefits of working with a nonprofit credit counseling agency is that, in addition to helping you create a debt repayment plan, these companies can advise you on issues that may have led you into debt in the first place. Your credit counselor may offer advice on how to cut your spending or create a monthly budget, for example.

At the end of the day, the main goal of debt management plans is helping consumers pay down their debts on their own. The credit counseling agencies that administer these plans help by offering financial advice and negotiating with creditors on their client’s behalf.

If you think you could benefit from professional guidance and advice, a debt management plan could be exactly what you need. Keep reading to learn more about how these plans work, where you can find them and how much they cost.

What is a debt management plan?

As mentioned, debt management plans are administered by third-party credit counseling agencies. Once you decide to work with a credit counseling agency on a debt management plan, you’ll need to go through several steps to get started:

  1. Think through all the debts you have and why they may have become a problem. Also keep in mind that debt management plans are typically for unsecured debts, so many secured debts like your mortgage will not qualify.
  2. You’ll meet with a credit counselor to go over all the details of your financial situation including your spending habits, regular bills, debts and income. Be prepared to be honest and forthcoming about your debts and your struggles.
  3. Once you share your story, your credit counselor will offer comprehensive advice on how you can improve your finances outside your debt management plan. This advice can include tips on budgeting, reducing your monthly expenditures and avoiding more debt.
  4. Next, your credit counselor will compile your data and ask you to commit to a debt management plan if they believe it’s the best option. If you choose to move forward, you will begin making a single monthly payment to the credit counseling agency who will disburse the funds on your behalf. Your credit counselor may also suggest alternatives to debt management plans if they believe a better option is available.
  5. If you move forward with a debt management plan, your credit counselor will negotiate with your creditors on your behalf with the goal of lowering your interest rate and reducing or waiving any fees associated with your accounts.
  6. You continue making monthly payments to the credit counseling agency that continues paying your debt obligations on your behalf. Since debt management plans can take 48 months or longer to complete, the process can be a lengthy one.
  7. Once you repay all your debts, your credit counseling agency can advise you on how to avoid debt and create a budget that works for your lifestyle and income.

While the steps above may seem lengthy and cumbersome, debt management plans exist because some consumers are simply unable to get out of debt on their own. Bruce McClary, vice president of communications for the National Foundation for Credit Counseling (NFCC), said that an array of circumstances can lead to situations where families need outside help. Job loss, chronic overspending, reduction in work hours, loss of income and unexpected major expenses are often the biggest culprits when consumers spiral into debt they cannot control.

While debt management plans may be an imperfect solution, these plans are often one of the best options for consumers since they ultimately lead them to a debt-free life, can help consumers learn better financial habits and won’t destroy consumer credit scores in the process.

With that in mind, it can make sense to sign up for a debt management plan if:

  • You’re struggling to keep up with credit card payments and your situation only seems to get worse each month.
  • You’re ready to commit to a debt repayment plan that could take 48 months or longer.
  • You earn enough income that you could feasibly pay down your debt with some outside help.

The pros and cons of debt management plans

There are some situations where debt is too far out of control for debt management plans to work. According to Kevin Gallegos, vice president of client enrollment for Freedom Debt Relief, consumers with more than $7,500 in unsecured debt that they are struggling to repay may want to consider an alternative, such as debt settlement.

However, the amount of debt that works best for debt management plans varies based on the consumer, their income and their unique circumstances. Bankruptcy is another extreme option for consumers to consider when they simply cannot pay off debts on their own.

This brings us to one of the main downsides of debt management plans — the fact that they won’t work for everyone. Here are some additional pros and cons of these plans you could consider before you sign up:

Pros

  • Credit counseling agencies may be able to negotiate down your interest rate and/or any fees charged to your accounts.
  • If you can reduce interest rates with a debt management plan, it’s possible you could get out of debt faster.
  • Debt management plans allow you to make a single monthly payment each month versus multiple payments. This can simplify your financial life and make it easier to budget.
  • Debt management plans offer more than a way out of debt; they also offer comprehensive financial advice and counseling that can help you stay out of debt in the future.
  • As McClary noted, past-due accounts you’re struggling to manage may become easier to pay off because of concessions (waived late fees, waived over the limit fees, etc.) creditors may make.
  • Your monthly payment could be lower with a debt management plan than the combined payments you were paying before.
  • If you’re truly struggling to get out of debt on your own, it helps to have a financial advocate by your side as your life changes, said McClary. Professional credit counselors can help you make adjustments and keep track over time.
  • While your credit score may take a hit before you get on a debt management plan, enrolling in a plan may not hurt your credit. In fact, your credit score will likely increase as you begin repaying your debts on a regular basis via your debt management plan.

Cons

  • Debt management plans are not free. These plans typically come with a monthly fee between $25 and $35. Some also charge a one-time enrollment fee.
  • Debt management plans only work for unsecured debts. For that reason, you cannot use a debt management plan to repay your mortgage or a car loan. However, McClary said your credit counselor can still advise you on how to repay these debts in addition to the debts in your debt management plan.
  • You need enough income to be able to make a monthly payment each month and commit to your program.
  • Rachel Kampersal said debt management plans require you to change your habits dramatically since you will have to stop using credit. “Per requirements from creditors, any card that is entered into a debt management plan will be closed, meaning you can no longer make charges to these cards. While difficult, it’s important to stop incurring new debt.”
  • Debt management requires a serious commitment. Most plans take 48 months or longer to complete.
  • Gallegos said that debt management plans require you to repay all the money you borrow, whereas some alternatives like debt settlement and bankruptcy may allow you to repay less than you actually owe.

How to find a debt management plan

Since debt management plans are individually tailored to each consumer, one plan can be wildly different than the next. McClary said your plan can vary depending on how much debt you owe, your current interest rates and payments and how your interest rates and fees are negotiated down. This is a huge benefit for consumers since debt management plans come with specific advice instead of blanket solutions that may or may not work.

“One of the benefits of talking to a nonprofit credit counselor is that the advice you get is going to be very specific to your situation,” said McClary. “If you enroll in a debt management plan, the counselor will work with you to make sure your plan is tailored to your unique set of circumstances.”

As we already mentioned, debt management plans often come with monthly administration fees in the $25 to $35 range. Some credit counseling agencies may charge more (or less) per month, and McClary said some also charge an upfront administration fee that can vary.

The good news is that, by choosing a nonprofit credit counseling agency, you can end up with an affordable option that will leave you better off. Despite the monthly fees these plans charge, debt management can help you save thousands of dollars through reduced interest rates and creditor concessions. Plus, you get valuable advice and financial guidance all along the way when you choose to work with a nonprofit credit counseling agency versus a for-profit agency who is “not directed to provide coaching or advice,” said McClary.

If you’re looking specifically for a nonprofit credit counseling agency to work with, explore NFCC member agencies, all of which are nonprofit. NFCC member agencies are required to meet eligibility criteria that ensure they are accredited by a third party, upfront about included fees and provide consumers with counseling and financial guidance that can help them improve their finances over time.

The NFCC also suggests tips that can help you find a credit counseling agency that will work on your behalf. Strive to find an agency that:

  • is a 501(c)(3) nonprofit agency (all NFCC member agencies must meet this criteria)
  • is accredited by a third-party agency and not self-accredited
  • offers debt counseling and comprehensive advice along with access to debt repayment resources
  • is upfront about their fees
  • hires only certified financial counselors
  • works with all creditors to negotiate down your interest rate and fees
  • will work with you regardless of how much debt you have
  • offers several debt relief solutions in addition to debt management plans
  • credits all your payments (outside of fees they charge) to your debts
  • is bonded and insured

As we mentioned already, all members of the NFCC are required to meet these strict guidelines and rigorously train the credit counselors they hire. For that reason, it’s smart to look closely at NFCC members when searching for a nonprofit credit counseling agency who can help.

Here are some of the agencies you can consider:

Agency

Availability

Fees
GreenPath Financial Wellness50 states by phone and internet; 50+ branches nationwideOne-time setup fee $0 to $50; $0 to $75 per month
American Consumer Credit Counseling50 states by phone and internet; in-person branches in 3 states (Massachusetts, California and Texas)$39 enrollment fee; $5 to $50 monthly fee
Clearpoint Credit Counseling50 states by phone or internet; 15 branches nationwide Monthly fee up to $50
Cambridge Credit CounselingAll 50 statesEnrollment fee up to $75; monthly fee up to $50
Advantage Credit Counseling Service50 states by phone or internet; 5 locations in PennsylvaniaOne-time $50 setup fee; $5 to $50 monthly fee
InCharge Debt SolutionsAll 50 statesOne-time $40 setup fee; $25 to $55 monthly fee

Finding and working with a credit counselor

Whether or not you choose to move forward with a debt management plan, you could benefit from working with a credit counselor. Nonprofit credit counseling agencies offer free consultations that can help you determine how much debt you have, potential solutions and whether a debt management plan is for you.

Many times, a credit counselor can offer insights into your financial situation that you may not see on your own. They may see obvious ways you can cut your spending that you may have overlooked, for example. Their extensive knowledge of debt relief options also makes them ideal mentors for consumers who need professional help when it comes to assessing their debts and figuring out a plan that will work.

Once you start working with a credit counselor, they will:

  • Help you review your credit report to confirm and take note of each of your debts and respective interest rates
  • Offer budgeting and spending advice that could help you improve your current financial state
  • Explain key financial topics
  • Create a tailored debt management plan that can help you pay down debt over several years
  • Help you find ways to build a new lifestyle that doesn’t rely on credit or debt
  • Offer support and encouragement

What types of debt are allowed?

Consumers can apply for a debt management plan regardless of their credit score. Once they set up an initial consultation with a credit counseling agency, they will go over the details of their debts and their income with their agency who will come up with an action plan on their behalf. If the consumer decides to move forward with a debt management plan, it can take a few hours or a few weeks to get started. “Once the recommendation for a debt management plan is made, it’s up to you to decide how quickly to enroll,” said McClary.

As we already noted, however, not all debts qualify for debt management plans since these plans are aimed at debts not secured by collateral.
Debts that are allowed in debt management plans typically include:

Debts not applicable to debt management plans usually include:

  • Mortgage debt
  • Auto loans
  • Home equity loans and home equity lines of credit (HELOCs)
  • Federal student loans

If you have unsecured debts that qualify for a debt management plan and secured debts that don’t qualify, a debt management plan can still work. When you sign up for a debt management plan with a nonprofit agency, the credit counselor assigned to your case will offer comprehensive financial advice that can help you pay down all your debts — not just debts governed by your debt management plan.

According to McClary, credit counselors are also trained to direct you toward government or other nonprofit resources that can help you manage and pay off secured debts like your mortgage or auto loan.

What to expect on a debt management plan

While starting a debt management plan may be a huge relief, consumers should be aware of how their lives may change — for better or for worse.

Those changes include:

  • You cannot sign up for new credit cards, nor can you use the ones you have. While it may sound unreasonable to bar you from using credit, the point of your debt management plan is helping you dig your way out. “The last thing you want to be doing is running up more high-interest debt on the side,” said McClary. “You’re not doing yourself any favors in that situation.”
  • Without credit as a crutch, you will need to learn how to live within your means. “Sticking with a debt management plan requires commitment and responsibility,” said Gallegos. You may need to learn how to use a budget each month, and you will likely have to cut some luxuries from your life.
  • You may be asked to start setting aside cash savings for emergencies during your debt management plan. You will have to get used to saving money and not spending it if times get tough.

While you’re on a debt management plan, you will likely check in with your credit counselor on a regular basis. Your counselor can help you stay on track while you find new ways to save and manage your budget each month.

Also, note how important it is for you to keep up with your monthly debt management payment. If you are late or skip a payment, you could end up putting your program at risk, said McClary.

Fortunately, most creditors will likely work with you if you miss a payment. They may provide you with some time to get back on track because they ultimately want to be paid back in the end.

And this is why working with a credit counselor can be so advantageous. “They can work on your behalf,” said McClary.

If you are working with a credit counselor and think you’ll miss a payment, they can take proactive steps to mitigate consequences and create a plan to get you back on track. They can even negotiate to have additional late payments or late fees reduced or waived if you miss a payment. The key to making this work is being completely open and honest about your situation and speaking with your credit counselor as soon as you realize your payment will be late.

What happens after your debt management plan ends

Let’s say you make it through a debt management plan to the end. What then?

The reality is, very little happens when you’re done. Once your debt management plan is paid off, you are debt-free. There is no probation period once your plan ends either, which means you are free to move forward without having to worry about making debt payments each month.

However, keep in mind that your credit counselor won’t automatically abandon you when your program is over. Nonprofit credit counseling agencies will continue to provide guidance and assistance if you need it, including advice on how to maintain the debt-free lifestyle you’ve worked so hard to achieve.

For some people, this is the hardest part. Once you’ve paid down a ton of debt, it can be far too easy to get comfortable and start borrowing money again. This is especially true since debt management plans do not ruin your credit, and your credit score may even surge once all your debt is paid off.

At this point, you will need to continue following the advice of the credit counseling agency you hired to help and remember the benefits of being debt-free. Life is a lot more difficult when you’re juggling credit card bills and other payments each month. If you want to avoid winding up back in debt, it’s crucial to remember how far you’ve come and how wonderful freedom feels.

Frequently asked questions

As you consider debt management plans and other debt relief alternatives, it can help to find out as many details about each program as you can. These frequently asked questions about debt management plan may help.

Since debt management plans are offered through many different credit counseling agencies, their fees can vary. However, most debt management plans charge a monthly fee of $25 to $35. Some credit counseling agencies also charge an upfront setup fee.
A credit counselor is a financial professional who is trained to help you manage your debts, budget your money and improve your finances over time. While credit counselors oversee debt management plans, they are also knowledgeable about alternative debt relief methods, such as debt settlement, debt consolidation and bankruptcy.
While your credit score may suffer if you’re falling behind on monthly payments before you get your debt management plan set up, starting your plan should provide some relief. Your credit score should increase as you begin making regular monthly payments and your debt balances drop. Experian does note that you may see some negative side effects when accounts are closed, usually due to changes with your credit utilization rate or credit mix.
Debt management plans can last 48 months or longer from start to finish. However, the exact timeline if your debt management plan will depend on how much debt you have, your interest rates and your income, among other factors.
You will continue paying interest to your creditors while you’re on a debt management plan. However, credit counselors work hard to negotiate lower interest rates and waive or reduce fees on your behalf.
You cannot use your existing credit cards while you’re on a debt management plan, nor can you open new accounts. McClary also said that if you do manage to open new credit card accounts during your debt management plan, existing creditors who find out may stop participating in your debt management plan and reset your account to its original terms and interest rate.
It’s possible you could qualify for a mortgage or car loan during a debt management plan. However, you will need to work with your credit counselor to determine eligibility and whether you should consider an alternative.

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Holly Johnson
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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Everything You Need to Know About Debt Settlement

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you’re struggling with consumer debt and can’t seem to dig your way out, you’re not alone. In fact, you are one of many millions of Americans who deal with debt and its consequences in any given year.

Fact: The average adult with a credit card carried $6,348 in debt, paying an average APR of 15.54%. So far in 2018, we have also paid $104 billion in credit card interest and fees, which is 35% more than Americans paid five years ago.

With these figures in mind, it’s no wonder so many of us continue to fall further and further behind.

The painful reality is that 70 million Americans were contacted about a debt in collections in 2017, which typically means their debt was in default for at least 180 days. Debt collectors call consumers to follow up on these debts over one billion times per year, with up to 15 calls made per account per day.

While consumers can sometimes figure out a way to pay debt off on their own, there are strategies that can expedite the process. Some opt to consolidate their debts with a new loan that offers better terms and a lower interest rate, for example. Others sign up for a debt management plan, which is a debt repayment plan operated by a third-party credit counselor.

Finally, some consumers opt to negotiate their debts down through a process known as debt settlement. This option comes with its own share of pros and cons, and risks for consumers.

Before you decide to settle your debts, understand how it works, what the consequences might be and who can help you manage the process. This guide was created to explain your options and offer all the information you’ll need to decide for or against debt settlement.

What is debt settlement?

Unlike debt management plans, which are often offered by nonprofit companies, debt settlement programs tend to be administered by for-profit organizations. With debt settlement, the company you work with aims to negotiate a “settlement” with your creditors that is less than the amount you owe.

Since you’re already behind on your debts before you begin this type of plan, the debt settlement company asks you to save a specific sum of cash each month in a dedicated savings account. You do maintain ownership over the funds you save as well as any interest that accrues in your account, though. Your debt settlement company may ask you to stop making payments on your debts during the negotiation process, resulting in you purposely putting yourself further in default.

The end goal of these programs is that once a settlement amount is reached, you would have saved enough cash to pay the lowered amount in full. Once the final lump sum payment is made, the accounts are considered satisfied.

While debt settlement is an imperfect solution to a complex problem, this strategy could be the best option for you. Here’s how you can decide if it’s right for you:

  • Determine the severity of your debt problems. According to Kevin Gallegos, vice president of client enrollment for Freedom Debt Relief, it’s important to make an honest assessment of whether you can pay down credit card balances and other debt on your own. Gallegos said that some people can use careful budgeting and belt-tightening or the debt snowball method to pay down debt without third-party help. Your first step should be figuring out how much you earn and comparing it with how much you owe on various debts each month. Look for ways to cut your budget and spending to free up cash you can use to repay your debts.
  • Ask yourself if another option could bring a better result. Take a close look at alternatives such as debt consolidation and debt management plans. Each plan has pros and cons (which are discussed below), so take the time to explore these options and how they might work in your situation.
  • Look closely at debt settlement if your situation warrants it. Gallegos said that generally speaking, debt settlement is a viable option for consumers who have significant debt ($7,500 or more) they can’t keep up with due to financial hardship.

When you should consider alternatives

While debt settlement can wipe away some of your debts if you’re struggling to keep up with minimum payments, there are times when you should look more closely at potential alternatives. Those instances can include:

  • The debts you’re struggling to repay are secured debts. Debt settlement is only an option for unsecured debts — or debts that are not secured by collateral. With that in mind, debt settlement won’t fix all your problems if you’re struggling to repay secured debts such as car loans, your mortgage, home equity loans or federal student loans.
  • You want to keep your credit score in good shape. Because debt settlement usually requires you to stop making payments on your debts until a settlement is reached, it’s likely your score will drop significantly as you move through the process. “If someone wants to protect credit scores more than put debt behind them, other options may be better,” said Gallegos.

How to settle your debts

Here are the main ways consumers can settle their debts by working with a third party or handling negotiations on their own.

Working directly with the debt collection agency

Mike Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling and debt management agency that does not offer debt settlement services, said that consumers settling their own debts with collections agencies is very rare. This is partly because the process is complex, but also because it takes so long.

Still, here are the steps you need to take if you prefer to settle your debts on your own.

  • Determine exactly how much you owe and make a list of all your credits and debt balances. You may also want to create a new spreadsheet or document so you can keep track of all your communications.
  • Make a written offer to each creditor. Generally speaking, debt settlement requires you to make a specific written offer to each creditor. While there is no cut-and-dried amount creditors will take, you can often negotiate debts down to less than half of the balance you owe. However, creditors may not reply to offers for 60 to 90 days or even more than that after you’ve missed a payment.
  • Continue making written counteroffers until an agreement is reached. Once again, this back-and-forth process can take many months. Once you have agreed with each creditor on an amount to be repaid, make sure you receive this agreement in writing.
  • Be prepared to have funds available for a lump-sum settlement. Gallegos noted that if you owe a creditor $10,000 and they confirm they are willing to accept 50% of that amount, you must have the cash available immediately. “You will have to come up with $5,000, or the deal is off the table,” he said.
  • Pay your settlement and demand a letter noting your debt has been satisfied. Make sure to get a letter from each creditor noting your payment and the satisfaction of your debts. This letter should be signed by an authorized agent of the creditor and share details of your settlement as well as wording that notes you no longer owe anything on debts associated with the account.

Working with a debt settlement company

Working with an agency that offers debt settlement is an easier proposition for many consumers since the debt settlement firm will perform most of the steps involved on your behalf. However, you’ll need to do some research and legwork upfront. The main steps required to work with a debt settlement company include:

  • Research different debt settlement companies. Gallegos said that it’s a good idea for consumers considering debt settlement to do plenty of research and talk with a few different companies to see how they work. Make sure to confirm the company you work with offers individualized plans that are tailored to your needs, he said. Also, find out how long the company has been in business, any statistics about their success rate and how good their reviews are. Gallegos said that the American Fair Credit Council is a good resource to use when evaluating debt settlement companies.
  • Watch out for companies with unethical practices. The Federal Trade Commission (FTC) said to avoid debt settlement companies that ask for money upfront, pressure you, makes guarantees about how your debts will be handled or don’t go over your financial situation in detail.
  • Compare debt settlement fees. While debt settlement companies are prohibited by law to charge upfront fees for their services, they do charge a percentage of the enrolled debt amount — usually 18% to 25%. Make sure to compare companies and their fees before you move forward.
  • Sign up for debt settlement. If you decide this is a viable option for you, you will need to sign a debt settlement contract. Once you are under contract, your debt settlement company will begin contacting your creditors on your behalf. You may be asked to stop making payments toward your debts during this time, which can hurt your credit score.
  • Start saving money. Your debt settlement company will ask you to start saving a set amount of money in a separate bank account during the negotiation process.
  • Reach a settlement with your creditors. If your debt settlement company can reach a settlement with creditors, the cash you’ve saved will be used to settle your remaining debts. At this point, your accounts will be considered charged off or satisfied, although you will likely have considerable damage to your credit score at this point. Keep in mind that the entire process can take 36 months or longer.

Debt settlement: Pros and cons to consider

While negotiating a settlement that is less than what you owe might sound advantageous, and it can be, debt settlement comes with both pros and cons. Here are the main advantages and disadvantages of this strategy:

Advantages of debt settlement:

  • Repay less than you owe on your debts including the current principal, interest and fees. The main benefit of debt settlement is that if it works, you will pay less than you owe to have your debts settled and gone for good.
  • Pay one monthly payment instead of several. Debt settlement lets you go from juggling several monthly payments to making a single payment toward your “savings” for future debt settlement each month.
  • You won’t pay fees for debts that can’t be settled. According to the FTC, debt settlement companies can only charge you fees on debts they’ve successfully negotiated down and settled on your behalf. This means you won’t be charged fees on debts they weren’t able to settle.
  • If you work with a debt settlement company, they will take care of many of the tasks involved in this process for you. Debt settlement companies do charge fees, but they will make phone calls, negotiate with creditors and deal with the details of your debt settlement on your behalf.

Disadvantages of debt settlement:

  • Not all debts qualify for debt settlement. While most types of unsecured debt can qualify for debt settlement, secured debts like your mortgage, car loan and federal student loans do not. Many other types of debt such as child support, gambling debts and back taxes do not qualify.
  • Debt settlement can result in damage to your credit score that takes years to fix. Because you’re typically asked to stop making payments on your debt during debt settlement, you will likely see damage to your credit score. However, Gallegos said that consumers typically see their scores bounce back once their debts are settled and they begin paying them off.
  • Debt settlement may result in tax consequences. Some settled debts may be considered income and taxable as a result unless you are considered “insolvent.” The FTC notes that insolvency typically describes a situation where your total debts are worth more than your assets. This may sound clear-cut, but they report that insolvency is difficult to determine and prove.
  • Debt settlement isn’t free. As we noted already, debt settlement costs money. You are typically charged 18% to 25% of each debt handled by a debt settlement company.
  • Creditors are not required to settle with you. Creditors are under no obligation to settle your debts. For that reason, there’s a chance you could go through all the steps required for debt settlement only to end up without any resolution to your problem. The FTC also points out that debt settlement companies may try to negotiate smaller debts first, while interest and fees on large debts continue to grow. This could leave you worse off than when you began the process.
  • Debt collectors may continue pursuing you. According to the FTC, creditors and debt collectors may continue to hound you for payment during the process. You could even be sued for repayment — even if you’re saving up money to settle your debts. If you are sued and you lose, your creditors could garnish your wages or even put a lien against your home.

What happens when you settle your debt

If you can move through the debt settlement process successfully and put all your debts behind you, the time and energy spent could be worth it despite the potential downsides. Why? Because your debts could go away for good, granting you a chance at a fresh start to rebuild your finances.

As we noted already, you may find you are liable for income taxes on some of your forgiven debts. You should also be aware that your credit score may have taken a significant hit that will take months or years to recover from.

Make sure to get a copy of a debt settlement letter from each of your creditors so you’ll have proof of the settlement and your payment if they try to collect in the future. Once you have this proof, you should also check your credit report to ensure settled debts are reported as “paid off.”

Alternatives to debt settlement

While the information we’ve offered on debt settlement may have you excited about the prospect, you may also be worried about the long-term consequences. Perhaps you want to keep your credit score in good shape while you get out of debt, or maybe you don’t like the idea of escaping full repayment of the debts you owe.

In any case, there are several alternatives to debt settlement you can consider. Your options include:

Debt management plan

Debt management plans are debt repayment plans administered by third-party credit counselors who work for nonprofit agencies. These credit counselors call your creditors and negotiate more favorable terms on your behalf, including lower interest rates and reduced or waived fees. Once creditors agree to these concessions, consumers begin making a single monthly payment to the nonprofit agency overseeing their debt management plan. The nonprofit agency then distributes funds to their creditors on their behalf, taking care of the grunt work for them.

Debt management plans can take up to 48 months or longer to complete. Consumers are also asked to stop using credit cards and get on a budget or spending plan during the process. Ultimately, the goal of debt management plans is helping consumers escape high interest and fees, pay down their debt over time and learn positive money habits along the way.

Pros:

  • Nonprofit credit counseling agencies will work on your behalf to negotiate lower interest rates and reduced or waived fees.
  • You may be able to preserve your credit score since you continue making payments all along, albeit through the nonprofit agency that administers your plan.
  • Debt management plans typically cost only $25 to $35 per month, whereas debt settlement can cost you 18% to 25% of your debts.
  • There is usually an educational component to complete with debt management plans, which could mean you’ll get better at budgeting and cash flow management.

Cons:

  • Debt management plans can take 48 months or longer to complete.
  • Debt management plans may be affordable, but you still have to pay for the help you receive.
  • You will ultimately pay back all the money you borrowed, whereas debt settlement lets you pay less than you owe.

Debt consolidation

Debt consolidation is another option to consider if you are financially unable to repay your debts. With debt consolidation, you will replace your existing loans with a new loan with better terms and a lower interest rate. The goals of debt consolidation can include lowering your monthly payment, saving money on interest and simplifying your finances with a single loan instead of several.

Pros:

  • You may be able to qualify for a new loan with a lower interest rate and better terms. Some 0% APR credit cards also let you transfer balances to secure zero interest for anywhere from 12 to 21 months (balance transfer fees may apply).
  • Debt consolidation lets you handle and repay your debts without third-party oversight.

Cons:

  • You may not be able to qualify for a debt consolidation loan or 0% APR cards with excellent terms if your credit score is in bad shape. Typically, the best loans and terms go to those with FICO scores of 740 or higher.
  • It takes a lot of discipline to pay off debt without any outside help. This makes this strategy difficult to execute if you’re already struggling.
  • Many debt consolidation loans, including home equity loans, personal loans and 0% balance transfer cards come with fees you have to pay to use them.

Bankruptcy

Bankruptcy is another last resort option to consider if you have considerable amounts of debt you can’t seem to handle on your own. However, it’s important to note there are two main types of bankruptcy to consider:

  • Chapter 7 bankruptcy may allow total discharge of your debts outside of other debts such as child support and back taxes. However, you may be required to sell assets to settle some of the amounts you owe.
  • Chapter 13 bankruptcy restructures your debt with a repayment plan instead of discharging your debts. You typically repay your debts over three to five years with this process, and you do not have to sell a property to settle amounts you owe.

Advantages and disadvantages of bankruptcy include:

Pros:

  • Discharge or restructure your debts depending on the bankruptcy option you choose.
  • Once your bankruptcy is complete, you can get a fresh start.
  • Certain assets such as your home, car, and retirement accounts are protected up to certain limits with Chapter 7 bankruptcy, so it’s possible you won’t lose everything in the process.

Cons:

  • There are requirements to qualify for Chapter 7 or Chapter 13 bankruptcy, meaning not everyone can access this option.
  • Chapter 13 bankruptcy stays on your credit report for seven years after you file, while Chapter 7 bankruptcy stays on your report for ten years.
  • Bankruptcy isn’t free since you will likely need to hire an attorney to walk you through the process. You must also receive credit counseling from a government-approved organization within six months before you file for bankruptcy, notes the FTC.

Frequently Asked Questions (FAQs)

As you continue researching ways to pay off your debt for good, it helps to educate yourself on debt settlement and its alternatives. This list of frequently asked questions could help you with your decision.

The FTC states that debt settlement companies are required to disclose certain information upfront such as the fees they charge, how long it will take to get results, how much you need to save before they can settle your debts and the consequences you will face when you stop making payments to your creditors. You should also be notified that the money you save — including interest — is yours and that the account you use for savings is not affiliated with the debt settlement company. You also have the right to withdraw your funds at any time for any reason without penalty.

Fees charged by debt settlement companies can vary based on how many of your debts they settle and the percentage they agree to charge upfront. However, many debt settlement companies charge 18% to 25% of their debts handled through the program. This could add up to thousands of dollars in fees once the program is complete.

Because debt settlement companies ask you to stop making payments on your debts and save up to settle them instead, your credit score will take a hit. Considering that your payment history makes up 35% of your FICO score, it should be no surprise that letting all your accounts go into default would damage your credit score.

While the answer is different for everyone, debt settlement is best for consumers with considerable unsecured debts they can’t seem to pay off on their own. These programs are often the last resort for consumers who struggle to keep up with minimum monthly payments and know they need help from a third party to avoid bankruptcy.

Debt settlement can take 36 months or longer to complete depending on how much debt you owe, how long your creditors take to negotiate and how long it takes you to save up the money you need to settle. Longer timelines are typically reserved for individuals with considerable debt and many creditors.

While you can settle your debts on your own, it’s not very common. Not only will you need to communicate back and forth with each creditor for many months, but you’ll have to negotiate with them to repay less than you owe. Many consumers don’t have the knowledge or confidence to negotiate on their own behalf, so they turn to debt settlement companies or nonprofit credit counseling agencies for help.

Typically, unsecured debts qualify for debt settlement. This can include credit card debt, unsecured personal loans, some private student loan debt, medical bills, auto repossessions, cell phone and utility bills from past providers and department and store charge card debt.

Debts that don’t work with debt settlement typically include secured debts. Common debts that don’t qualify are car loans, mortgage loans, federal student loans, utility bills from current providers, overdue taxes, gambling debts and debts resulting from lawsuits.

Debt consolidation involves getting a new loan with a lower interest rate and better terms with the goal of combining old, higher interest debts into a single new debt. Common financial products used in debt consolidation include personal loans, home equity loans, home equity lines of credit (HELOCs) and balance transfer credit cards.

Debt settlement is a long-term process that involves having a third-party debt settlement company settle debts on your behalf while you save the cash for your settlement instead of making payments on your debts. With debt settlement, you may be able to repay less than the amounts you owe.

A debt management plan is a third-party debt repayment plan that is typically administered by a nonprofit credit counseling agency. With a debt management plan, the credit counseling agency will negotiate with your creditors to lower your interest rate and remove late fees or over-the-limit fees from your account. During the program, you’ll make a single monthly payment to the nonprofit credit counseling agency who will disburse the funds on your behalf.

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Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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What does the American dream look like to you? Does it include a home of your own, a car or two in the driveway and a career that helps you feel happy and fulfilled? Maybe you want or have children, too, regardless of how much it costs to raise them.

Unfortunately, pursuing these dreams can be a costly endeavor. A car and a house, for example, may each require a loan. If you want both, the cumulative effect of those loans can be devastating.

Consider the following debt statistics:

  • Average student loan debt for Class of 2017 graduates hit $39,400, according to Student Loan Hero, another LendingTree-owned website.
  • Americans have paid banks $104 billion in credit card interest and fees so far in 2018, representing a 35% increase from just five years ago.
  • The average new car loan among borrowers came with a payment of $525 a month in the second quarter of 2018, according to Experian’s State of the Automotive Finance Market report. And the bulk of new car loans (about 73%) were for 61 to 84 months long.

High debt could make it difficult to realize your financial dreams. But there are plenty of ways to borrow less, pay off debt you already owe and gain more financial freedom.

Here’s a deep dive into the kinds of debt you may face, as well as practical solutions to help you organize, reduce or pay off debt that stands in your way.

The difference between ‘good’ and ‘bad’ debt

Not all debt is created equal. There is debt that can help you build wealth, and there is debt that prevents you from building wealth. It’s important to know how to identify which is which. Consider the following.

Tony Liddle, a Wisconsin financial adviser who works for Prosper Wealth Management, said it’s important to note the difference between good and bad debt so that you can focus your debt payoff efforts on the debts that matter most.

Generally speaking, a mortgage for a home you live in is good debt, he said. Your home may go up in value, and everyone needs a place to live. It is also difficult and time-consuming to save up the money to pay for a home in cash, especially in areas of the country where real estate is pricey. So taking out a home loan may be necessary.

But there’s a limit to good debt, since it’s far too easy to borrow more than you can afford. There’s a fine line for sure, but it’s possible to buy more house than you need and wind up with a mortgage payment you can’t afford.

The same can be said for car loans, Liddle said. You may need a car to get to work, but you may not need to borrow the maximum a lender offers.

Student loans can also run in the same vein. Borrowing money to earn a college degree can pay off in spades over the course of your career, but borrowing more than you need to graduate isn’t always smart.

Regardless, it’s important to prioritize your debt so your money is going where it will count the most.

Which debt should you tackle first?

Financial adviser Don Roork, of AssetDynamics Wealth Management and Wisdom for the Wealthy, said consumers should focus on paying off unsecured debt first. This includes debt such as credit cards and personal loans. That’s because unsecured debt can make it difficult to build wealth, but it’s also because it tends to come with higher interest rates. The average credit card currently has an APR of 15.5%, for example.

Here’s one way you may want to prioritize your debt repayment:

  • Pay off unsecured debt first, particularly credit card debt with high interest rates.
  • Focus on personal loans and other unsecured debt as a secondary priority.
  • Tackle auto loan debt since cars depreciate quickly.
  • Leave mortgage debt and student loans for last since they tend to come with low interest rates.

Managing your credit card debt

While credit cards can be convenient to use, the exorbitant interest rates they charge can make it difficult to repay balances over time. We already mentioned how the average credit card interest rate is 15.5%, but many credit cards charge even higher rates — particularly to borrowers with poor or fair credit.

Liddle also noted that the gimmicks that credit card issuers come up with can make it hard to avoid them. Some cards offer rewards for every dollar you spend, for example. Offers for 0% APR could also tempt you into spending more than you planned.

If you do wind up with credit card debt that you’re struggling to repay, Liddle said it can interrupt your life in too many ways to count.

“You can’t advance your financial life with investing when you’re throwing all your money into debt and interest payments,” he said. And if you keep making the minimum payment, you’re mostly just paying interest and avoiding real progress. “You’re basically just treading water at that point, which will never help you get out of debt.”

If you want to pay off credit card debt, several strategies can help.

Consider a balance transfer credit card

Some credit cards offer 0% APR on balance transfers for a limited time — usually between 12 and 21 months. These cards let you avoid interest payments during that time, which can expedite your debt payoff process.

Liddle said balance transfer offers can be valuable tools if used strategically, but you should beware of balance transfer fees that can be as high as 5% of your balance. Also, note that your introductory APR only lasts for a while before resetting to a much higher rate.

You can also look for a balance transfer card that doesn’t charge any balance transfer fees. Nick Clements of MagnifyMoney said this option is best for consumers with relatively small amounts of debt ($5,000 or below) that they can pay off quickly.

Negotiate with your creditors

Mike Sullivan, a personal finance consultant with nonprofit credit counseling agency Take Charge America, said it’s possible to negotiate with your creditors if you’re falling behind on your payments.

“Most creditors have hardship programs that extend payments and reduce interest rates but do not reduce balances owed,” Sullivan said. You could negotiate down your interest rate or monthly payment, but you’ll still have to pay off your debts in the long run.

Negotiate for a debt settlement

Sullivan said no creditor wants to be the one left holding the bag while others collect. It’s best to notify all creditors that you cannot and will not be paying off entire debts if you don’t believe you will be able to do so.

From there, you can make an offer to pay about 50% of your balance over three years, or 20% immediately in exchange for a written statement that the amount has been accepted as payment in full for the debt.

That’s just a general suggestion, and this strategy doesn’t always work. But you may want to give it a try if you have credit card debt you truly cannot pay off. Also keep in mind that there are debt settlement companies who can assist you with this process.

Try the debt snowball or debt avalanche

If you have the means to pay off your credit card debt over time, you may make more progress if you’re strategic about it. These two debt repayment strategies may help you stay motivated as you get ahead on your finances.

  • Debt snowball: With this strategy, you’ll make large payments on your smallest balances first. This could help you stay motivated as you pay off debt.
  • Debt avalanche: You’ll pay off high-interest balances first. This could save you money in the long term.

Either method asks you to pay as much as you can toward the prioritized balance until it’s gone while making the minimum payment on the rest of your debt. Use this calculator to find out which method is better suited for you.

Consolidate credit card debt with a personal loan

Personal loans come with fixed interest rates, fixed repayment schedules and fixed monthly payments that can make paying off debt easier to plan. You may also qualify for a much lower interest rate depending on your creditworthiness. Clements said debt consolidation loans are good for people who need a longer timeline to repay their debts and prefer the stability of a fixed-rate, fixed-payment loan. Use our table below to compare multiple options to get the lowest interest rate!

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— Learn more about the best ways to consolidate debt here

How to stay out of credit card debt once you pay it off

No matter what strategy you use to pay off credit card debt, it’s far too easy to fall back into old habits. Here are some strategies that can help you avoid getting into more debt once you’ve paid it off:

  • Stop using credit cards. Liddle said consumers who are prone to credit card debt may want to avoid using credit cards altogether. “It really depends on the person, but you need to be honest with yourself if you’re someone who can’t seem to use credit responsibly.”
  • Only use credit for emergencies. You can keep a credit card for emergencies, but refrain from using it for everyday purchases. Put your credit cards in your sock drawer or a safe so you’re not tempted to use them.
  • Set your credit card bill to be paid automatically. If you want to use credit cards for the perks or rewards once you’re out of debt, it would help to set up your bill on autopay so that it’s paid off each month no matter what.

Paying off your auto loan

A car loan can be a valuable tool if you need a vehicle to get to work and can’t afford to pay in cash. But not enough people realize just how harmful huge car payments can be, and far too many tend to buy more car than they can truly afford. Very often, those who take out car loans with bad credit have it the worst since they tend to pay higher interest rates.

Roork said that, most of the time, it boils down to self-image. Consumers want to look like they have money, so they take out car loans for tens of thousands of dollars and pledge to pay them off for up to 84 months. But those $500-plus payments can make it difficult to save money and keep up with other bills. And since automobiles are notorious for depreciating at a rapid pace, huge car loans are akin to setting money on fire.

If you haven’t borrowed money for a car yet and don’t want to make a life-altering car loan mistake, Liddle said it’s wise to limit your loan to just three years. That way, your larger monthly payments have a better chance of keeping up with depreciation as your car loses value. Plus, you’re not making such a lengthy commitment.

If you have a car loan already and you want to pay it off, consider these strategies.

Refinance your car loan

If your car loan has a high interest rate and you believe you can get a better deal, it may be possible to refinance your auto loan into a new loan with a lower interest rate and better terms. If you do get a lower interest rate, refinancing can help you secure a lower monthly payment or make it easier to pay your loan off faster if you continue paying the same amount you’re paying now.

Pay as much as you can each month

Paying more than the minimum payment on your car loan can help you get out of debt faster. Make sure your loan doesn’t have any prepayment penalties, then pay as much as you can each month, whether that means rounding up your payment to the next hundred dollars or adding whatever you can.

Sell your car and start over

If you owe less than your car is worth, you can also sell your car by owner (or through trade-in at a dealership) and start over with a less expensive car. If you owe more than your car is worth (e.g., you owe $10,000 on a car worth $8,000 according to Kelley Blue Book), you will need to make up the difference when you sell.

Tackling your student loan debt

According to the Bureau of Labor Statistics, Americans with a high school diploma earned an average of $712 a week in 2017, while those with a bachelor’s degree earned $1,173. Workers with a professional degree earned average wages of $1,836 a week last year, while doctoral graduates earned slightly less.

As you can see, student loan debt can be good debt if used wisely. While you are borrowing money to attend college, your loan can pay off in the form of higher earnings for your entire career.

The good news is, federal student loans tend to come with low interest rates and fixed repayment schedules. For that reason, it makes sense to focus on paying off higher-rate and unsecured debts first.

How to lower your student loan payments

But that doesn’t mean your monthly student loans are affordable or easy to handle — even if they’re at a lower interest rate. If you need your student loan payments to be lower, consider these strategies.

Opt for an extended repayment plan that lasts up to 25 years

While the standard repayment plans for federal student loans last 10 years, you can opt for an extended repayment plan that lasts for up to 25 years. You’ll secure a lower monthly payment this way, although you’ll need to pay on your loans for a longer stretch of time.

Check out income-driven repayment plans

Income-driven repayment (IDR) plans let you pay a percentage of your discretionary income for up to 25 years before forgiving your remaining loan balances. Read about the pros and cons of IDR plans before you consider this option.

Find out if you qualify for loan forgiveness

There are myriad student loan forgiveness options, ranging from Public Service Loan Forgiveness (PSLF) to special forgiveness for teachers and members of the military. Read about student loan forgiveness options to see if you qualify.

Refinance your student loans

If you have excellent credit (or a cosigner with excellent credit), you may be able to refinance student loans with a private lender who can offer a lower interest rate. But keep in mind that you give up federal protections such as forbearance and deferment, along with access to IDR plans, if you refinance federal loans with a private lender.

How to pay off your student loans

Let’s say you don’t care to lower your monthly payment but prefer to pay your student loans off as quickly as possible instead. Consider these tips.

Refinance your student loans

If you can refinance your student loans with a private lender and get a lower interest rate, you can pay less in interest each month and pay your loans off faster. As we mentioned already, you will give up federal student loan protections and benefits if you refinance federal loans into private loans.

Make additional payments

Paying as much as you can toward your student loans each month will help you get out of debt faster, particularly if you can make extra payments regularly. Since interest accrues on unsubsidized loans during school, making regular payments on those loans can save you even more.

Make payments as soon as you can

While some student loans don’t require payments until after you graduate or after your grace period is over, you should start making payments while you’re still in school if you can. Doing so will reduce your loan balance and help you get out of debt faster.

Sign up for auto-drafted payments

Some student loan servicers offer a .25% discount if you set up your payments to be done automatically.

Paying off your mortgage

The debate over whether to pay off your mortgage has waged on for years. Some experts suggest that you should take as long as possible to pay off your mortgage since you likely have a low interest rate and may be able to write off mortgage interest on your taxes. Others who are averse to debt would rather you pay off your mortgage loan early.

There is no right or wrong answer here, but you may want to focus on paying off your mortgage once your other debt is gone. If you have an adjustable-rate mortgage (ARM) and you worry interest rates may rise, for example, focusing on mortgage debt could be a smart move. Perhaps you are less than five years from retirement and want to make sure you have all debt paid off before you settle into a new life with a fixed income.

Maybe you just dislike debt and no longer want to owe anything to anyone. Provided other more important debts are paid off, this is OK as well.

But Liddle notes that you could be better off investing your money instead of prepaying your mortgage. If you have a fixed-rate mortgage loan at 4% APR but you could earn 8% in the stock market, then paying off your mortgage may not be a great deal over the long haul. But again, the right answer for you depends on your attitude toward debt, your appetite for risk and your goals.

If you are seriously considering paying your mortgage off early, here are a few ways to do it.

Review government-backed loan modification and refinance programs

Several government-backed mortgage modification programs exist to help homeowners, including the Home Affordable Refinance Program (HARP), Federal Housing Administration Streamline refinancing and Veterans Affairs Interest Rate Reduction Refinance Loans (IRRRL). These programs can help you qualify for a lower interest rate that can make paying off your mortgage faster a much easier task.

Refinance your mortgage

You can also refinance your mortgage through traditional means, either to reduce your interest rate, your repayment timeline or both. Refinancing a 30-year loan into a fixed-rate 15-year loan may help you secure a lower interest rate and cut years (or a decade or more) off your repayment timeline, for example. But keep in mind that you’ll have to pay closing costs on a new mortgage loan.

Sell your home and start over

You can also consider selling your home and starting over, keeping in mind that the average real estate agent will charge 6% to sell and market your home. If you were able to sell your home and turn a profit after real estate fees and moving expenses were factored in, you could purchase a less expensive home and start the process over.

Make biweekly payments or extra payments

Also keep in mind that you can pay off your mortgage faster by making extra payments or biweekly payments. With extra payments, you can either round up your payment each month to an amount you can afford or strive to make at least one extra mortgage payment each year. You could also opt for biweekly payments that would result in one extra mortgage payment being made every 12 months since you would make 26 half-payments instead of 12 full mortgage payments.

Dealing with debt sent to collections

No matter how hard you try to stay on top of your debts, there are times when it’s easier just to let things go. Unfortunately, late payments can hurt your credit score and result in late fees and fines that make catching up that much harder.

While creditors may try to collect on a late debt themselves for up to 180 days, your debts in default will eventually be sent to collections. “At that time, the company’s bottom line takes a hit for the amount owed,” Sullivan said.

Some creditors have in-house collections professionals, while others hire outside firms to contact consumers to see if they can get them to pay. Sullivan said, sometimes, creditors will just sell off their outstanding debts to collections companies. Either way, someone is eventually going to contact you about the amounts you owe.

What to expect with debt in collections

Debt collectors tend to get a bad reputation since they are known for hounding debtors at home and at their jobs. Sullivan even said many debt collectors will intentionally try to make the experience uncomfortable so you’ll just pay what you owe to get the calls to stop.

Fortunately, the Fair Debt Collection Practices Act (FDCPA) spells out limits for debt collectors, as well as penalties for those who threaten, call too late at night or contact employers and family members.

According to Sullivan, the FDCPA permits consumers to notify collectors in writing that they must stop all communication with that consumer, but many do not know this or fail to take advantage of it. Make sure to read up on the FDCPA at our parent company, LendingTree, and know your rights if you feel you are being unfairly targeted or the victim of abusive practices.

How to handle debt in collections

The best way to deal with debt in collections is to deal with debt collectors directly and honestly, Sullivan said. If you decide not to repay your debts and send a letter to ask debt collectors to cease communication per FDCPA rules, debt collections calls should theoretically come to an abrupt halt. If the calls do not end, keep careful records of all contact. “A consumer can take a collector to small claims court for violations of the law and cash awards can be substantial,” Sullivan said.

If you do want to pay off your debt and strike a deal, Sullivan said to put your negotiation cap on. Often, debt collection companies pay only a fraction of the price of your debt to take it over. With that in mind, you could offer a fraction of what you owe and still help them turn a profit. Imagine you owed $10,000 in credit card debt and it got sent to a collections agency that paid only $2,000 to acquire that debt, for example. Even if you offered $3,000 (30%) of the amounts you owed, the collections agency may be inclined to accept it.

The key is to agree on an amount that ends all collection efforts while helping the collection agency get its investment back.

While it may be tempting to ignore debt collectors altogether, this strategy can backfire. Keep in mind that debt collectors can take steps to have your future wages garnished until the debt is repaid, provided the statute of limitations for the debt isn’t up (varies by state), so you can’t just wish it away. Consumers also need to understand that if wage garnishment is successful, their total debt owed can balloon because of late fees, legal fees and interest, Sullivan said.

Bankruptcy: When and where to file

If you’re at the point in your journey where you know you need legal help to get out of debt, it might be time to explore bankruptcy. There are two main types of bankruptcy to consider:

  • Chapter 7 bankruptcy makes it possible to discharge your debts completely, although there are exceptions, such as student loans, child support and some tax obligations.
  • Chapter 13 reorganizes your debts instead of discharging them. This type of bankruptcy allows you to create a payment plan that will repay all or some of your debts over three to five years.

While both types of bankruptcy could be beneficial depending on your situation, it’s likely that you’ll only qualify for one or the other.

Chapter 7 bankruptcy has a “means test” that limits the amount of income you can have and still qualify, for example. You can only file for Chapter 7 bankruptcy if your income is lower than the median income in your state for your family size. This type of bankruptcy may require you to sell your assets, but your house and cars are protected up to certain amounts that vary by state. Retirement accounts, including 401(k), 403(b)s and IRAs, are also protected fully or up to certain limits.

With Chapter 13 bankruptcy, you need to be able to prove you can afford a repayment plan. You also must have filed both state and federal taxes in the last four years, and have total secured debts below $1,149,525 and total unsecured debts below $383,175. But you do not have to sell any property to make up for shortfalls when you file for Chapter 13 bankruptcy.

Filing for Chapter 7 or Chapter 13 bankruptcy requires an in-depth knowledge of the law and your finances. Further, the U.S. government said mistakes and misunderstandings in your case have the potential to threaten your rights. For that reason, it is strongly recommended that you hire a qualified attorney to help with your bankruptcy case.

Regardless, you can file for bankruptcy on your own and without an attorney’s help. Bankruptcy forms are also available for free online. Bankruptcy is best used as a last resort. Debt consolidation is an option that should be considered before filing bankruptcy. You can compare the two options here.

Setting yourself up for financial success

If you’re someone who is determined to pay off debt that you owe, it’s important to approach your goals with the right frame of mind. Clements said that without the right mindset, no debt-payoff strategy can help you. This is especially true if you’re thinking about refinancing your debt or reorganizing it with another loan.

“Before you think about any product that can reduce an interest rate or shorten a repayment term, you need to make sure you solve the budgeting problem first,” Clements said. “Far too many people think that a balance transfer or debt consolidation will solve their problem, but it won’t” — at least, not until the underlying spending problem is addressed.

If you use a balance transfer card to secure 0% interest and pay down debt but continue using credit cards for purchases you can’t afford, you’re not going to end up any better off once your card’s introductory offer is over, he said.

Here are some of the steps you can take to set yourself up for success:

A monthly budget can help you manage your income and your expenses while also keeping you accountable for each dollar you spend. While there are plenty of budgeting apps out there, you can also budget using a pen and paper. Write out all your bills and all your monthly expenses so you can keep track of where your money goes each month, and you’ll be much better off.

Also take the time to track your spending from the last few months. Break out your bank statements and credit card bills, then tally up how much you spent each month in fluctuating categories such as food and dining out, entertainment, transportation, cable television/internet, clothing, etc. You may be surprised at how much you’re spending in certain categories. If you find areas you can cut in your budget, you can reallocate those extra funds toward your debts.

Both Liddle and Roork suggested a similar approach to emergency funds. Build a $1,000 to $2,000 temporary emergency fund as you pay down debt by saving what you can each month, even if it’s just $50 or $100. Once you’re free from consumer debt, try to save up 3 to 6 months’ worth of expenses to cover emergency medical bills, surprise car repairs, job loss and other surprises life might throw your way.

Automating some of your important bills can also help you stay on track with your spending and goals, particularly if you’re using a budget each month. Automate recurring payments and keep track of them in your monthly budget so you never forget when they’re due and always have money set aside for them. And remember, you can automate payments toward recurring bills and your debts.

Life after debt

Life without debt can be a reality, but it takes a lot of work to get there. Not only do you have to focus on paying off the debts you’ve amassed, but you also need to learn how to avoid debt in the future.

Roork said the key to living debt-free is making sure your lifestyle aligns with your wages — not your wants. If you’re debt-free and budgeting each month, it should become very apparent how much you can afford for housing, food and fun, while also reaching your financial goals. And there’s nothing wrong with occasionally splurging, provided your bills are paid and your needs are met.

It’s all about balance.

“Balance today’s lifestyle with the life you want in the future,” Roork said.

Investing for retirement

To that end, both Liddle and Roork suggest getting on track with your retirement goals once you’re debt-free — or even while you’re paying off debt. If your employer offers a 401(k) or similar plan and you haven’t opened an account yet, doing so should be your first step.

Contribute at least enough to get an employer match if your employer offers one. But both advisers said to aim to save 15% or more, including your employer match, if you want to build up a nest egg you can retire on. Of course, it never hurts to save a lot more than that if you can afford it.

If you’re self-employed, you can open your own retirement account. Consider a SEP IRA, Solo 401(k) or similar retirement account to start saving on your own.

Also remember that anyone can open and contribute to a traditional IRA and may be able to deduct their contributions on their taxes depending on their income. You can also open a Roth IRA, provided you meet income requirements. Keep in mind, however, that you can only invest up to $5,500 a year across both a traditional and Roth IRA ($6,500 if you’re 50 and older).

Saving for other financial goals

Besides investing for retirement, you’ll also want to make sure you’re saving money for other goals you might have. After all, you will likely want to enjoy the spoils of your debt-free lifestyle to a certain extent. Perhaps you want to take a vacation, remodel your kitchen or upgrade to a nicer home. Once you are debt-free, all those goals become easier to accomplish provided you make savings a priority.

We already mentioned how you should strive to save three to six months of expenses for emergencies, but you can also set up savings accounts for other goals, such as for your child’s college education or travel. You may strive to put away at least 10% of your income in cash (outside your retirement accounts) for these goals.

Open a high-interest savings account (or several) and set up automatic deposits in amounts you can afford, whether that’s $100 a week or $100 a month. The key to building up savings is making sure your contributions are consistent and keeping your accounts out of sight so you aren’t tempted to spend money you’ve saved.

Final thoughts

A life without debt is entirely possible, and there are myriad benefits to enjoy on the other side. With enough time and hard work, you can build a life that requires few bills or financial stress. You can start saving and investing for a future you can be excited about, and you can break the paycheck-to-paycheck cycle that has plagued you so far.

But like anything else, this process won’t start on its own. Debt freedom won’t magically appear one day, just like money won’t fall out of the sky.

Believe in yourself and focus on the life you want, and you can get out of debt with enough time. Digging your way out of debt won’t be easy, but it will be worth it.

Disclaimer: MagnifyMoney and Student Loan Hero are LendingTree-owned companies. This article contains links from Student Loan Hero and LendingTree.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Personal Loans vs. Credit Cards: Which is Right for You?

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If you need to borrow money and pay it back over time, you may want to consider an unsecured credit card or a personal loan. Neither option requires you to put down collateral, and you can spend the money however you want.

Before you choose between a personal loan or a credit card, however, it’s smart to take a close look at both options to see which one might leave you better off. The best option for your situation will probably depend on how you plan to use the money, how much you need to borrow, and how long you need to pay your loan back.

How do personal loans work?

Personal loans allow consumers to borrow money with a fixed interest rate, a fixed monthly payment, and a fixed repayment schedule. This means you’ll know exactly how much you need to pay each month as well as the date you’ll pay your loan off.

Most personal loan companies let you borrow up to $35,000, although some companies do extend higher amounts to those who qualify. Generally speaking, these loans are best for individuals who need to borrow a large amount of money and pay it back over a longer timeline.

Personal loan benefits

Personal loans can work well for a variety of situations, whether you need to borrow money to consolidate debt, pay for a major home repair, or cover unexpected medical bills. The main benefits of personal loans include:

  • With a fixed repayment plan, you know exactly when you’ll pay your loan off.
  • Securing a fixed interest rate means you will never have to worry about interest charges ballooning out of control.
  • Having a fixed monthly payment can make budgeting for your personal loan easier.
  • Interest rates on personal loans can be lower than other forms of debt, depending on your credit score.

Drawbacks of a personal loan

Personal loans can provide you with the cash you need, but that doesn’t mean they’re perfect. These loans come with costs you need to be aware of as well as their own share of downsides. For example:

  • Personal loans often come with fees, such as an origination fee of 1% to 8% of your loan balance.
  • You may not qualify for the best interest rates if you have poor credit.
  • You have to borrow a set amount upfront, versus credit cards that offer a line of credit you can borrow against.

Qualifications for approval

To qualify for a personal loan with the best rates and terms, you usually need good or excellent credit. Some personal loan companies will accept consumers with credit scores as low as 580, but only if they pay a higher interest rate.

In addition to having the credit to qualify, you also need to be able to prove your ability to repay by presenting pay stubs or other proof of employment. Since lenders prefer to loan money to borrowers who aren’t overly strapped for cash, you’ll also need a debt-to-income ratio that isn’t too high.

Your debt-to-income ratio is determined by taking your total monthly debts and dividing them by your monthly income. If you have $2,000 in total monthly recurring debt and your monthly income is $4,000, your debt-to-income ratio would be 50%. According to Discover Personal Loans, consumers with debt-to-income ratios below 36 percent may qualify for personal loans with the best rates and terms.

If you don’t meet the criteria to qualify for a personal loan on your own, you may be able to qualify with the help of a co-signer.

When is a personal loan better than a credit card?

A personal loan may be better than a credit card in the following situations:

  • You need several years to repay your loan and prefer a fixed interest rate and monthly payment you can count on. While credit cards also let you borrow money to make purchases, most come with variable interest rates and monthly payments that can go up and down based on interest rates and the amount you owe.
  • You need to borrow money to pay expenses you can’t pay with a credit card, such as repaying a family member you borrowed money from. A credit card can be a valuable tool, but it’s not ideal if what you really need is cash. A personal loan is better if you need cash deposited in your bank account.
  • You want to consolidate debt at a lower interest rate but need several years to pay it off. Some credit cards offer 0% interest on purchases or balance transfers for up to 21 months, but the interest rate will be reset after the introductory offer is over. If you need more time to pay off debt at a lower interest rate, a personal loan could make more sense.

Where to find the best personal loans

While you can check local banks and credit unions to compare their personal loan options, an easy way to research and assess offers is by doing it online. MagnifyMoney offers a comprehensive list of the best personal loan offers that makes it easy to see how each one stacks up.

Remember that the best way to find your ideal personal loan is to compare offers from several lenders, not just one. Make sure to compare loan terms, fees, and interest rates to find the best deal. LendingTree allows you to compare mutliple offers at once without hurting your credit score. Use our table below!

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24 to 60

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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

How do credit cards work?

A credit card provides you with a line of credit you can use to make purchases, transfer a balance, or take out a cash advance. Credit cards usually come with variable interest rates, and interest is charged daily on your balance. If you pay your balance in full every month, however, you can avoid interest charges and use your line of credit over and over again.

Since the amount you borrow with a credit card will vary depending on the purchases you make, your payment can vary from month to month. However, you’re required to make a minimum monthly payment each month, which may be as low as 2.5% of your balance.

Benefits of a credit card

A credit card can be a valuable tool you can use to your advantage, particularly if you need to make a smaller purchase you can pay off in a short amount of time. The main benefits of credit cards include:

  • Some credit cards offer 0% APR on balance transfers and purchases for a limited time, usually 12 months or longer.
  • You pay no interest fees if you pay off the card in full every month.
  • Some credit cards offer rewards on your purchases, such as cash back or travel rewards.

Drawbacks of a credit card

Credit cards can be ideal if you get a 0% offer or can pay off a large purchase quickly, but there are downsides that come with them compared to personal loans. Some of the drawbacks include:

  • Even though some credit cards offer 0% interest for a limited time, credit cards charge an average interest rate of 15.5%.
  • Your monthly payment may be harder to plan for since it is based on a variable interest rate, as well as your credit card balance.
  • Some credit cards charge annual fees. You may be charged other fees as well, such as late fees, over-the-limit fees, cash advance fees, foreign transaction fees, and balance transfer fees.

Qualifications for approval

The qualifications to get approved for a credit card are typically the same as the ones for personal loans. You need good or excellent credit to qualify for a credit card with the best interest rates and terms, for example. You also need to be able to prove your ability to repay with proof of employment and a reportable income. Finally, you need to have a reasonable debt-to-income ratio since the bank won’t want to let you borrow more than you can afford. According to Experian, many lenders prefer a debt-to-income ratio below 36%.

If you’re curious to see whether you could get a credit card of your own, there are also several ways to check if you’re pre-qualified.

When is a credit card better than a personal loan?

While personal loans can make sense when you need to borrow money, there are times when a credit card can be a better deal. Examples include:

  • You can qualify for a 0% APR offer and repay your balance before your card’s introductory offer ends. If you only need to borrow money for a few months, a zero interest credit card can work as an interest-free loan.
  • You’re unsure how much you need to borrow and prefer a line of credit over a loan. Since credit cards only require you to repay amounts you borrow, they can make more sense if you need a line of credit to borrow against as needed.
  • You have the cash to repay your balance and avoid interest, so you want to rack up rewards. If you have the cash on-hand to repay amounts you borrow right away, a rewards card will let you earn points or miles for each dollar you spend. Keep in mind, however, that it’s a bad idea to pursue rewards if you plan to carry a balance, since the interest you’ll pay is likely more than the rewards you’ll earn.

Where to find the best credit cards

Credit cards are easy to apply for online, which is why it makes so much sense to start your research on the internet. MagnifyMoney breaks down the best credit cards in every category, which makes comparing cards and their benefits a simple task. Make sure to compare all factors before you decide on a card, such as the interest rate, 0% APR offer and terms, and any applicable fees.

Credit cards vs. personal loans

 

Credit Cards

Personal Loans

Average Interest Rate

The average annual percentage rate (APR) of credit cards is currently about 15.5%. However, credit card APRs can range from as low as 9.9% to as high as 29.99%

Personal loan rates can range from 5.99% to as much as 35.99% APR, depending on the borrower's credit history. For those with “good” credit (a FICO score between 680-720), APRs currently range from 10 to 13%.

Terms

Credit cards typically charge a variable rate. Credit card interest rates can change based on market rates and can change to a penalty rate if you miss payments.

Personal loans typically come with a fixed interest rate, fixed monthly payments, and a fixed repayment term.

Monthly Payments

Your monthly payment will depend on your balance and your interest rate. Formulas for minimum monthly payments differ among credit card issuers, but they can be as low as around 2.5% of the outstanding balance.

Your monthly payment is a fixed amount based upon the amount you borrow, the length of your loan, and your interest rate.

Average Loan Limit

Your credit limit depends on several factors, including your income and your debt-to-income ratio.

Many lenders offer personal loans up to $35,000, but some offer bigger loans to those who qualify.

Fees

Credit cards can come with annual fees. You may also have to pay late fees, over-the-limit fees, cash advance fees, and foreign transaction fees. Consumers who transfer a balance pay an average balance transfer fee of 3.46%.

Personal loans have an origination fee of 2% to 5% of the amount borrowed (some can go as low as 1% or as high as 8%). Not all lenders charge origination fees, however.

Personal loans vs. credit cards: Which one is right for you?

Before you decide between a personal loan and a credit card, think long and hard about why you need to borrow money and what kind of terms you’d require to pay it back. Some questions to ask yourself as you continue your research include:

  • What do you need the funds for? While personal loans can work better if you need actual cash to spend, a credit card could also work if you need a line of credit to make a purchase.
  • How much can you afford to repay every month? If you can only afford to repay a set amount of money each month, a personal loan with a fixed monthly payment could be ideal. To find out how much you could borrow and still get a monthly payment you can afford, check your options with this personal loan calculator.
  • Are you consolidating debt? If you’re consolidating debt, you need to be able to qualify for a lower interest rate than the average rate you’re paying now. Compare credit cards and personal loan offers to see which ones offer the lowest interest rates for your credit score and situation.
  • How much do you need to borrow? A personal loan could be better if you need to borrow a larger amount and pay it back over several years.
  • How long do you need to repay your loan? If you believe you can repay borrowed funds within the span of a year or slightly longer, a balance transfer card that offers 0% on purchases and balance transfers could work as an interest-free loan. Keep in mind, however, that you may need to pay a balance transfer fee if you transfer a balance, depending on the card you apply for.

The bottom line

Should you get a personal loan or a credit card? At the end of the day, only you can decide. Both options can work well in the right situation, but your specific financial needs will determine which one is best. As always, make sure you read through the terms and conditions along with the fine print before you sign up for any financial product.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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How to Finance a New Air Conditioning Unit

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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There are many reasons homeowners choose to replace their existing air conditioning or HVAC unit, including a desire for greater energy efficiency or better functionality. Homeowners wishing to sell their properties may also want to consider upgrading their HVAC system first — especially if it’s old. Six percent of real estate professionals who participated in the 2017 Remodeling Impact Report from the National Association of the Remodeling Industry (NARI) and National Association of Realtors noted that an upgraded HVAC system recently helped them close a sale.

While it’s obvious a new HVAC system can lead to greater comfort in your home and perhaps even a more attractive resale proposition for buyers, there is one problem that comes with replacing your HVAC — the cost.

While the NARI remodelers estimated that replacing an HVAC unit ran consumers approximately $7,475 nationally in 2017, you may pay more (or less) depending on the size of your home and where you live. For example, HVAC system company Trane quotes a standard XR Series HVAC system for $5,600 to $7,800 (including installation) if you live in central Indiana and have a home that’s 2,000-3,000 square feet. If your ZIP code is 90210 and you live in Beverly Hills, Calif., on the other hand, the same system is estimated to cost $8,800 to $12,000. For a smaller-sized home — less than 1,000 square feet in this example — you would pay considerably less, however. In central Indiana, Trane estimates an HVAC system would set you back $4,600 to $6,600. In Beverly Hills, you would pay $6,800 to $9,400.

With these costs in mind, you may be wondering about the best ways to pay for a new HVAC system. Should you save up the cash or pull from your emergency fund? Or, would financing with a credit card or personal loan leave you better off?

At the end of the day, the right way to pay for a new HVAC system depends on your goals and your personal finances. Consider these loan and financing options as you move forward with your research.

Credit cards

A credit card can be a valuable tool when used with careful thought and consideration. It can make sense to finance an HVAC unit with a credit card in many situations, including ones where you can qualify for a low interest rate or even an introductory 0% APR on purchases.

Some consumers who have the cash to pay for their HVAC unit in full may choose to use credit for additional reasons such as earning cash back or travel rewards. If a consumer uses a cashback card that earns 2% back to purchase a $7,475 HVAC unit, they would pocket $149.50 in rewards with little effort on their part.

What to watch out for

While it could be smart to use a credit card to pay for an HVAC unit, there are several pitfalls to watch out for. Risks include:

  • Length of introductory 0% APR offers: If you’re using a card that offers an intro 0% APR on balance transfers or new purchases, you’ll want to read the terms of your offer to see how long it lasts. Once your introductory 0% APR offer ends, the regular purchase APR will apply to any balance remaining after the end of the intro period. Some credit cards charge deferred interest, meaning you have to pay interest on the remaining balance and interest that would have been charged to the amount you paid off during the 0% APR period.
  • High interest rates on rewards cards: While earning rewards on your HVAC system can make sense if you have the cash, it is not a smart move if you plan to carry a balance. Considering the average credit card APR is 15%, the rewards you earn would be dwarfed by the interest you’ll pay over the long run.

What to look for in a credit card when financing an HVAC unit

If you’re looking for a credit card to cover your HVAC purchase, it makes sense to consider your goals first. Are you hoping to secure 0% interest on purchases to save on interest?

If you’re seeking a card that offers 0% on purchases, you’ll want to understand how long the interest offer will last as well as any applicable fees. You can compare credit card offers right here on MagnifyMoney.

Personal loans

A personal loan is another option you can use to finance an HVAC system. This financial product offers many benefits that can be advantageous if you need some time to pay for your HVAC unit, including fixed interest rates, a fixed repayment schedule and a fixed monthly payment.
Depending on your credit score, a personal loan may also offer a lower interest rate than you might receive with a credit card or other types of financing.

What to watch out for

While a personal loan could be ideal if you need to borrow money for a new HVAC system, there are several details you’ll want to watch out for and understand:

  • Fees: Some personal loans come with fees such as an origination fee. However, not all personal loans come with this fee or any upfront fees, so make sure to check.
  • Precomputed interest: Precomputed interest is a complicated interest scheme that may leave you paying more interest than you would with a loan that doesn’t precompute interest — especially toward the beginning of your loan. You should avoid personal loans that compute interest this way.
  • Prepayment penalties: Some personal loans may charge fees if you pay your loan off early. You should avoid personal loans that employ this “gotcha.”

What to look for in a personal loan when financing an HVAC unit

How much you’ll pay to access a personal loan depends on the interest rate and the fees you’re charged. With that in mind, you should compare offers to find personal loans with the lowest interest rate and lowest fees (or no fees). Also, make sure your personal loan doesn’t have a prepayment penalty so you won’t suffer financial consequences if you pay your loan off early.

Finally, make sure your personal loan comes with a monthly payment and repayment timeline you can live with. To compare loans and estimate the costs of borrowing, you can browse here.

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Home equity loans

A home equity loan works similarly to a personal loan in the fact that both offer fixed interest rates, fixed monthly payments and a fixed repayment timeline. However, personal loans are unsecured loans, whereas home equity loans are secured by the equity in your home. Another option is a home equity line of credit (HELOC), which is a revolving line of credit secured by your home. HELOCs have variable interest rates, and you only pay interest on the amount you borrow, so your monthly payments will vary.

— Read more on the differences between a Personal Loan vs. Home equity Loan here!

The amount you can borrow with a home equity loan is typically limited to 85% of your home’s value. For this reason, this option may not work for you unless you have considerable equity in your property. On a positive note, the interest rate you can qualify for may be lower than other financial products because the loan is secured by the value of your home. The interest you pay on your home equity loan may also be tax-deductible.

What to watch out for

Before you apply for a home equity loan, make sure you understand both the advantages and any potential pitfalls. Here are some downsides you’ll want to be aware of:

  • Fees: Home equity loans come with many of the same fees as a traditional mortgage, including application fees, loan processing fees, origination or underwriting fees, lender or funding fees, appraisal fees, document preparation and recording fees, and broker fees. If these fees are wrapped into the cost of your loan instead of being charged upfront, you’ll pay more interest to finance them. HELOCs may have low (or no) closing costs.
  • You could lose your home: Because home equity loans are secured by the value of your home, you could lose your home to foreclosure if you don’t repay the home equity loan.
  • You may not qualify: These loans are intended for consumers who have considerable equity in their homes, which is why you can only borrow up to 85% of your home’s value in most cases. If you don’t have a lot of home equity, you cannot qualify for a home equity loan.
  • Unpredictable costs: With a HELOC, your interest rate could change at any time. And because you don’t have fixed monthly payments and can carry a balance, you could end up with a hefty bill when it comes time to repay what you’ve borrowed.

What to look for in a home equity loan when financing an HVAC unit

If you’re considering a home equity loan to finance your HVAC purchase, you’ll want to shop around to find a loan with the lowest interest rate and fees you can find. The Federal Trade Commission (FTC) also notes you should ask if you’re paying any points (a fee you can pay to secure a lower interest rate), since points and other finance charges can lead to higher costs upfront.

The FTC also suggests comparing several loan offers to ensure each lender or broker is competing for your business with the best loan terms possible. Fortunately, you can compare home equity loans online with our parent company, LendingTree.

Company or contractor financing

Because some consumers need to borrow money to purchase a HVAC system, many companies that manufacture and install HVAC units offer their own financing plans. In most cases, they partner with a lender to offer in-house loans. While the terms of these offers vary, company financing can be a good deal if you can secure a low interest rate or 0% APR financing for enough time to pay your HVAC unit off.

What to watch out for

While financing your HVAC system through the company you purchase it from may sound convenient, there are several potential downsides. Watch out for:

  • Short introductory offers: While some HVAC companies may be able to offer 0% APR on their products for up to 60 months, not all companies will offer zero-interest terms that long. Make sure you understand how long your 0% APR offer lasts, as well as how high your interest rate will be once it resets.
  • High interest rates: Like other loans, the terms of your HVAC loan will depend on your credit score and income. Make sure to compare offers to find the best interest rate possible, whether that comes with company financing or another type of loan.
  • Fees: Make sure to ask about any fees you may be charged for your HVAC loan.

What to look for in a company financing when financing an HVAC unit

If you decide you want to compare company financing for an HVAC unit with other financial products, you’ll probably want to call around and ask HVAC vendors in your area. You can also research HVAC companies that offer in-house financing online. If you decide to dive into this option, make sure to ask specifically about financing plans, interest rates and any fees you’ll have to pay to secure a loan. Since HVAC vendors use different banks to fund their consumer loans, the terms of these offers can vary widely.

Fortunately, it’s a lot easier to find information on credit cards, personal loans and home equity loans online. A quick internet search can pull up a treasure trove of information that can help you compare loan and financing offers to find the best deal. Having your HVAC financing lined up before you shop, you can be choosy when it comes to selecting an HVAC unit and the company you want to install it.

Will my credit score take a hit?

Several factors make up your credit score, including ones that can be impacted when you make a large purchase. “New credit” makes up 10% of your FICO score, for example, and opening new lines of credit in a short amount of time can make you seem like a greater risk. As a result, you may see an impact to your credit score if you open a new credit account to pay for your HVAC system.

How much you owe in relation to your credit limits makes up another 30% of your FICO score, and this figure will skew higher if you charge an HVAC system to an existing revolving line of credit (like a credit card). Many experts recommend keeping your credit utilization below 30% to keep your credit score in the best shape possible.

The bottom line

If you know you need to replace your HVAC system and don’t want to wind up suffering without heat or AC while you research loans, time is of the essence. To find the best HVAC financing options for your needs, make sure you read through the terms and conditions of any loan you’re considering and compare more than one loan option at once.

HVAC units aren’t cheap by any means, but you can avoid overspending if you can secure financing with a low interest rate and favorable terms.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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Pay Down My Debt

The Pros and Cons of Debt Consolidation & Methods

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

Pros and Cons of Debt Consolidation
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As of June 2018, Americans carry over $1 trillion in revolving debt, according to data from the Federal Reserve. And carrying debt can be troublesome if it has high interest rates. Credit cards, for example, had an average rate of 15.54% in the second quarter of 2018. That can make it hard for you to manage payments and pay down your debt sooner.

While it would be nice to wish our debt away, you may be considering the next best option: debt consolidation. It could help you save money and potentially pay down debt faster.

Like any financial strategy, debt consolidation isn’t perfect. There are pros and cons to consider anytime you restructure your debt or take out a new loan.

Pros of debt consolidation

The advantages of debt consolidation are often important enough for consumers to overlook any potential downsides. That’s because debt consolidation has the potential to save you money while getting you out of debt.

Here’s a rundown of how debt consolidation could help you save money, along with the additional advantages that come with this strategy.

1. You could repay your debt sooner

One of the biggest advantages of debt consolidation is the potential to save money and time on your debt, said financial planner Justin Pritchard of Approach Financial in Montrose, Colo. One goal of debt consolidation is to get a lower interest rate. With a lower rate, more of your payments are going toward your principal balance each month.

Imagine you have $6,000 in credit card debt at an APR of 15%. If you made a minimum payment of $120 each month, you’d pay a total of $9,473 over seven years. But if you consolidated your debt into a personal loan with an 8% APR and made the same monthly payment, you’d repay a total of $7,323 over five years instead. That’s a savings of more than $2,000 and two years of loan payments.

Pritchard notes that high interest rates make it difficult to pay down debt, whereas a lower rate can help you make a bigger dent in your balance with each monthly payment you make. If you’re able to consolidate to a lower rate and keep making the same monthly payment, you can make a lot of progress in a shorter amount of time. Use our table below to compare multiple offers in minutes to get the lowest interest rate!

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

2. You could simplify your finances

Financial planner Neal Frankle of Credit Pilgrim said debt consolidation can simplify repayment. If you have a lot of different accounts, he said, it’s easy to get disorganized and miss a payment. This could lead to both late fees and a ding to your credit score, which wouldn’t help your situation.

By consolidating your debt into a single new loan, you can go from multiple monthly debt payments down to one. This could make it easier to stay on top of your payments and focus on your end goal, Frankle said.

3. You may be able to secure a fixed repayment schedule

Financial adviser Fred Leamnson noted that revolving debt, such as credit card debt, may be harder to pay off if you’re still using credit. If you continue spending on your credit card while you make payments, you can get stuck in a cycle where your new credit card charges outpace any progress you make.

If you consolidate debt with a personal loan, you could opt for a fixed interest rate. That would make your monthly payment and repayment period easier to manage. Plus, you couldn’t tack on more debt to your personal loan. Just be wary of accumulating new debt on your paid-off credit card.

Cons of debt consolidation

While securing a lower interest rate can help you save money on your debt, consolidating with a personal loan or another financial product does come with risks.

Some of the main disadvantages of consolidating your debts include:

1. Consolidating your debt won’t solve your financial problems on its own

Financial planner Dan Kellermeyer of New Heights Financial Planning said debt consolidation may not provide a long-term solution if you have trouble controlling your spending.

“For people who have bad spending habits, I would recommend seeking help from a budget coach or financial planner first,” he said. That way, you can get to the root of your problem and prevent a situation where you consolidate debt but continue racking up new debt.

2. Debt consolidation can cost money on its own

Depending on how you choose to consolidate your debt, you may have to pay upfront costs. For example, personal loans can come with origination fees from 1 percent to 8 percent. Home equity loans, on the other hand, come with closing costs similar to those of a traditional mortgage.

These costs or fees can offset your savings, Pritchard said. For that reason, you should factor in any fees you’ll pay to ensure debt consolidation is worth it. Also consider looking for debt consolidation options that don’t charge any fees.

Pros & Cons of each debt consolidation method

Before you consolidate debt to save money or speed up your repayment timeline, you may want to consider the different loan options available. Consider this breakdown of the popular debt consolidation methods, along with their pros and cons.

What it is

A balance transfer card is a type of credit card that offers 0% APR for a limited time. These cards may let you transfer multiple credit card balances and loans over to the new rate, helping you save money on interest and score a single monthly payment.

Pros

  • If you can pay off your debt during your card’s 0% introductory term, this option is basically an interest-free loan.

  • It’s easy to research and apply for balance transfer cards online.

  • Some balance transfer cards don’t charge any fees to transfer your balance.


Cons

  • Most balance transfer cards charge a 3% to 5% fee to transfer your balance.

  • If you continue using your credit card after you consolidate, you may have trouble paying off your debt before the promotional period ends.

  • You could temporarily impact your credit because you’re adding hard inquiries to your credit report, noted Pritchard. “If you’re in credit-building mode, that may impact your ability to get a great deal on a mortgage or car loan,” he said.

  • Your introductory APR won’t last forever. While you may get 0% for up to 20 months, your card’s rate will rise after the promotional period.

Who is it best for?

Balance transfer cards make the most sense for people with high credit scores because they can usually qualify for the promotional rates. These cards are also best for consumers who can stop using their credit cards so that they can focus on paying off their debt for good.

Where to find the best offer

Check our marketplace for balance transfer cards. Consider the length of each promotional period and fees.

What it is

A debt consolidation loan is a personal loan used to consolidate debt. Personal loans come with a fixed interest rate, monthly payment, and repayment schedule.

Pros

  • Personal loans can offer attractive interest rates that can help consumers save money in debt repayment.

  • Debt consolidation loans help you create a debt payoff plan. “These loans can help set a timeline for wiping out your debt,” Frankle said. “That structure is really helpful for some people.”

  • While a balance transfer card could leave you tempted to continue using it for purchases, this isn’t an option with a personal loan. That could mean you’re better able to stick to your financial goals.


Cons

  • While debt consolidation loans can lower your monthly payments, you may end up paying more in interest if you stretch out your repayment timeline, Kellermeyer said.

  • Consolidating debt only moves your debt, and it could make it easier to rack up more. “You don’t actually reduce the amount you owe, and consolidating can free up your credit cards and tempt you to spend more,” Pritchard said.

  • The interest rate may be higher on these loans than with some other options.

Who is it best for?

Debt consolidation loans are best for consumers who need a structured way to pay off their debt. They’re also a smart option for consumers with high credit scores since they may be able to qualify for the lowest interest rates.

Where to find the best offer

Compare lenders using our debt consolidation loan marketplace. Double-check lender fees, rates, and borrowing limits.

What it is

A home equity loan is a fixed-rate debt that uses the equity you have in your home as collateral. You’ll have a fixed monthly payment and repayment timeline.

Pros

  • Since this is a secured loan, you may qualify for a lower interest rate than you could get with other debt consolidation options.

  • You can refinance revolving debt such as credit card debt into a loan product with a fixed interest rate and fixed monthly payment.


Cons

  • You can only borrow up to 85 percent of your home’s value with a home equity loan. So this option may not be available to some homebuyers.

  • Home equity loans may come with costs such as an application or loan processing fee, an origination or underwriting fee, a lender or funding fee, an appraisal fee, document preparation and recording fees, and broker fees.

  • You could lose your home to foreclosure if you don’t repay this loan.

Who is it best for?

“A home equity loan might make sense if you have significant equity in your house, a secure income source that’s going to keep you out of foreclosure, and you really want to minimize your interest rate,” Pritchard said.

Where to find the best offer

Start your search by reviewing our guide to home equity loans. Weigh the benefits of a home equity loan compared with the idea of using your home as collateral.

What it is

A home equity line of credit (HELOC) is a line of credit that lets you borrow against the equity in your home. HELOCs typically come with variable interest rates.

Pros

  • Since HELOCs are secured by the equity in your home, they can offer attractive interest rates.

  • HELOCs don’t require you to borrow a set amount. Instead, you get the option to borrow amounts that you need up to a preset limit.


Cons

  • HELOCs can come with fees, including for applications, title searches and appraisals. But not all HELOCs charge these fees, so make sure to shop around.

  • Since you only have to repay amounts you borrow, your monthly payment can vary widely.

  • HELOCs typically come with variable interest rates, meaning your payment could go up or down throughout the life of your loan.

  • You can only borrow up to 85 percent of your home’s value, so this option is only good for those who have a lot of home equity.

Who is it best for?

HELOCs are best for consumers who have a lot of equity in their homes and want a line of credit to borrow against.

Where to find the best offer

Kick-start your search by learning more about HELOCs. Consider comparing your options for a HELOC with a balance transfer card. Review rates as you shop lenders and ensure you’re comfortable with using your home as collateral.

What it is

Debt management plans are overseen by credit counseling agencies, according to Kevin Gallegos, vice president of new client enrollment at Freedom Debt Relief. With these plans, consumers make a monthly payment that’s used to pay their creditors based on a payment plan that’s agreed upon by all parties. This type of plan may land you a lower interest rate and reduced fees.

Pros

  • Gallegos said a debt management plan could “simplify bill-paying by combining debts to obtain one interest rate and one payment.”

  • Joseph Martin, a credit counselor with Take Charge America, a national nonprofit credit counseling and debt management agency, said credit counseling agencies do a lot of the work for you with these plans. “With a debt management plan offered through a nonprofit credit counseling agency, a credit counselor works on your behalf to negotiate more favorable terms with each creditor. ... Once you make your single payment each month, they also take steps to disburse the funds for you on your behalf.

  • A debt management plan could help you secure a lower interest rate, Gallegos said. “As a result, you can more easily meet your monthly budget, or pay more than the minimum to repay your debt more quickly.”


Cons

  • Debt management plans typically charge a monthly administration fee. These fees can add up over the course of a debt management program. But these fees can be offset by the interest you save.

  • If you enroll in a debt management plan, you need to stop using your credit cards to receive the full benefit. “That can be a big challenge for some,” Gallegos said.

Who is it best for?

Gallegos said debt management plans are best for consumers with less than $7,500 in unsecured debt who can make monthly payments, and who would benefit from a slightly lower interest rate.

Where to find the best offer

Martin said you can take part in a confidential, free credit counseling session at a nonprofit agency. Consider checking in with the National Foundation for Credit Counseling.

The bottom line

Consolidating debt can be a good move if it helps you save money or repay your debt faster. But it’s important to consider all your options before you pull the trigger.

The right debt consolidation method for you can vary. Consider what kind of debt you have and how much you have of it, your current interest rates and which consolidation methods are available. By doing some research, you can wind up with the best debt consolidation product for your unique needs.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
Holly Johnson |

Holly Johnson is a writer at MagnifyMoney. You can email Holly here

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