Have you considered debt settlement as a way out of your debt problems? Thousands of Americans have chosen it. They’ve settled their debts or hired debt settlement firms to handle the task for them. If you owe more, and maybe a lot more, than $10,000 and are four or five months behind on your bills then debt settlement could be a good option.

The downside of DIY debt settlement

Some experts believe that DIY debt settlement is better than hiring a debt settlement company because lenders are more likely to agree to better settlements with individuals than with a professional settlement firm. The big downside of DIY debt settlement is the need to have money available to pay for the settlements. Let’s say you owe $4000 on one credit card, $3000 on another and $8000 on a personal loan. If you’re a decent negotiator you might be able to get that $15,000 total settled for $7500. But you would need to have $2000, $1500 and $4000 available to pay for those settlements. And if you’re having a serious problem with debt, it would be very surprising if you had that much cash available. Fortunately, there is an alternative. You could get a personal loan and use the proceeds to pay off your settlements. But you might not want to do this unless you could get a personal loan with a much lower interest rate than the average interest rate of the debts you’re settling. Beyond this, here is five important things you need to know about personal loans.

The two types of personal loans

The two types of personal loans are secured loans and unsecured loans. A secured loan is where you are required to put up some asset as collateral to secure it. For example, auto loans are secured loans because the automobile is the collateral. Secured loans are fairly commonplace. Probably the biggest example of a secured loan is a mortgage as it’s secured by the house. If you were to default on your mortgage, your lender could actually repossess the house and have you evicted.

An unsecured loan is one where there is no collateral involved. The interest rates on these loans are typically higher to offset the fact that the lender is taking more of a risk because if you were to default about all the lender could do is sue you.

Banks aren’t the only place to get a personal loan

When you think about a personal loan the first place you probably think to go is your bank. But if you go only to your bank for a loan you may not get the best offer. What you should do instead is shop several different financial institutions just as you would shop for a car. That way you’re most likely to get a good deal. For example, credit unions are not-for-profits so they may be able to offer a lower rate than a bank. You might also check out some of the new peer-to-peer lending websites such as Lending Club, SoFI and Prosper. However, spoiler alert – you will need to have a pretty good credit score in order to get a loan from one of these lenders. But if you do qualify you will likely get one of the lowest interest rates available. For example, SoFI is currently offering personal loans with interest rates of 5.95% to12.99% APR and LendingClub has personal loans with interest rates as low as 6.78% APR.

What you want to avoid is a payday loan as those lenders typically charge exorbitant interest rates.

Your best option might not be a conventional loan

As you just read, it’s possible to get a personal loan at a very low interest rate but there’s an option that might even be better. It’s to get a 0% balance transfer card. Some of these have interest-free periods as long as 18 months and at least one card issuer has a balance transfer card with 0% interest for 22 months. However, you’ll need a pretty good credit score to qualify for one of these cards.

In addition, there is a possible negative to using the money from one of these cards for debt settlement. It’s that under normal circumstances if you write a check to get money from a credit card account you’ll get slammed with an interest rate that could be as high as 22%. While this might not be the case with a 0% interest balance transfer card, it’s certainly something you would want to check out before signing up for the card.

Don’t apply for multiple personal loans

Every time you apply for new credit it triggers a credit inquiry. This will ding your credit score. If you were to apply for just one loan your score would be dropped by just two points. If you have a decent credit score that probably wouldn’t make much of a difference. However, if you were to apply for six different loans that would ding your credit score by at least 12 points and could drop you from having very good credit to just good credit.