Debt consolidation can be a wonderful way to simplify your life. Instead of having multiple payments due on different days, you can have one payment due each month. This can make it easier to budget for your expenses and eliminate some of the stress that comes with managing debt. Here are seven separate ways to consolidate your debt and how to choose the option that is best for you.
Credit Card Balance Transfers:
One of the simplest debt consolidation options is to transfer debt from your existing credit cards to a new or existing card with a lower interest rate. This will allow you to pay down debt more quickly, as you will not be losing as much money each month in interest payments. When choosing which card to transfer debt to, it is important that the credit limit on the card is higher than or equal to the total amount of debt you are transferring so there are not any problems completing the transaction.
Also make sure there is not an annual fee for using the new credit card and that there is not a balance transfer fee (although this can sometimes be waived if you complete the transfer within a certain timeframe). If there is a balance transfer fee than decide if the interest savings is enough to makes sense to transfer the balance. Also, if the credit card is allowing you a lower interest rate for a specific period, create a plan to have that transferred debt paid off by the specified date or else the accumulated interest will be added to the credit card balance.
Another option for debt consolidation is to take out a personal loan. This type of loan can be used to pay off credit card debt and is not a secured loan, meaning there is no collateral to cover the loan in the event you do not pay it back. Having no collateral means the lender is putting their trust in you to pay this debt.
When considering a personal loan as a debt consolidation option, it is important to compare interest rates from different lenders. I have found that credit unions typically have lower interest rates, if you already have a relationship established with one for your other loans or financials then that process will usually be seamless.
The interest rate on a personal loan should be lower than the interest rates on your existing debt for you to save money overall. The lenders will look at your debt-to-income ratio and credit score to determine if they will lend you this money.
It is important you let the lender know you will be using this money to consolidate debt because that will be a determining factor of whether they will lend you the money. If they know the loan is meant to eliminate all your credit card debt and remove those minimum payments from multiple creditors than they may be more willing to loan the money.
Be sure to use the money to pay off those credit cards. It can be tempting to use it for other things once it is deposited into your account but think about how that will negatively affect your financial situation and put you in more debt.
Home Equity Loan or Line of Credit:
If you have equity built up in your home, you may want to consider taking out a home equity loan or line of credit (HELOC). The interest rates on these types of debt consolidation loans are lower than the interest rate on a personal loan and you may be able to deduct the interest payments from your taxes. If you default on a HELOC or home equity loan, however, it puts your house at risk which makes it a risky debt consolidation option for many people.
With a life insurance loan, you can borrow against the cash value of your policy. The money does not have to be paid back but it will reduce what beneficiaries receive when they claim ownership after death. If you have a $10,000 life insurance policy and borrow $8,000 from that policy to for debt consolidation or whatever you use it for then in the event you pass away and never pay any of it back your beneficiaries will only have $2,000 available to cover your death expenses or whatever instructions, you left for its use.
A debt management plan is another way to consolidate debt that does not involve taking out any new loans. Instead, creditors will come together with debtors through an agency like National Debt Relief to create one monthly payment that covers all debts included in the program. This can make paying off debt much easier since there are not multiple due dates each month.
However, debt settlement company typically charge a fee and take a percentage of the total savings as their commission. This option should only be considered if you are already behind on payments and have no hope of catching up, and you have already attempted to settle these debts on your own with your creditor without much success.
Completing this process directly with your creditors will save you thousands of dollars. Just know whether you complete this you or the settlement company completes this process you will need to have a lump sum of money available to pay the settlement amounts. Settling debt also has a negative impact on your credit score so it is important to think long and hard before choosing this option.
Chapter 13 Bankruptcy:
Filing for Chapter 13 bankruptcy can be an effective way to consolidate all your debt into one monthly payment over three to five years. This type of bankruptcy allows you to keep your assets, like your house and car, while repaying debt. It is important to note that filing for Chapter 13 bankruptcy will have a negative impact on your credit score and remain on your credit report for up to ten years.
There are many different options available for consolidating debt. The best option for you depends on your individual situation and the amount of debt you have. By investigating all the different debt consolidation options, you can find the one that will help you get back on track financially and simplify your life.
Retirement plans allow you to take a loan on the contributions in your retirement account. The money can be used to pay off debt if the debt is causing you financial hardship. Withdrawing from your retirement can be a straightforward process, but there are a couple of ramifications to consider.
First, there are tax penalties to withdraw this money early which can take a considerable sum of money that could have been used for retirement. Also, this money will be included in your income for the year. Be sure this additional income will not negatively impact future financial plans, such as being eligible for grants or other processes that review your income to determine eligibility.
If you find yourself struggling to keep up with your high-interest debts and juggling multiple payments every month, debt consolidation may be a good option for you. It is an effective way to deal with your debt and can help you get back on track financially. It is one of the many effective tools available to help you manage your debt and it can really make a difference in your monthly payments and interest rates.
If you are feeling overwhelmed by your debts, give debt consolidation some serious thought. You may be surprised at how much easier it makes managing your money. Have you ever consolidated your debts? What was your experience like?