Learning how to consolidate debt can be a good way to make your loans and finances more manageable. It can also improve your credit score.
Below is a comprehensive guide on how to do debt consolidation.
How To Consolidate Debt | Choose These Options
How to Consolidate Debt: Features to Look For
Knowing how to consolidate debt can save you from a lot of financial woes, including bankruptcy. It is a smart debt management strategy. You can now focus on only one debt, instead of many different payments.
To consolidate your debt, you have many options. They can vary, but an ideal program should have the following features:
- Free consultations
- No fees or minimal fees
- Simple enrollment
- Debt settlement plan that runs for three to five years
- Minor impact on your credit score
You also remove many debts when you choose a private loan from a family member or friend. In exchange, you pay only one debt to one person each month.
Nevertheless, these loans can be easier to manage than the others. They almost always have low to zero interest. Payments are also more flexible, and you can avoid origination fees.
However, there are drawbacks to this type of loan, especially if there are issues with repayment. Relationships are at risk if anything goes wrong. They also do not eliminate the stress that comes with having debt. Moreover, you may have to divulge information about yourself and finances you wish to keep private.
You can learn how to consolidate debt with personal loans. A personal loan can come from banks or credit unions.
The lender sets the well-defined terms. Its interest rates are commonly fixed and based on your credit score. Nonpayment, though, can lead to wage garnishment.
The benefits of a personal loan include the following:
- Many choices for potential lenders
- Clear repayment schedule
If you’re considering a personal loan as a debt management plan, make sure the interest rate is lower than that of your existing debt. Agree to repayment terms that will be reasonable for you to maintain.
Make sure to shop around for the best combination of loan, interest, and repayment terms possible.
Keep in mind there’s a possibility you may not qualify for a loan if you lack creditworthiness. Also, you may not be able to receive the amount you need to consolidate all your debt.
Credit Card Debt Consolidation
A credit card is an unsecured debt that can wreak havoc on your finances if you allow it to accumulate. By knowing how to consolidate debt, you can remove all or most of your loans. Moreover, you can potentially increase your credit score.
It’s possible to do a balance transfer to consolidate credit card debt. It works by moving the credit card balances from a card with a high interest rate to one with a lower rate. If you can move them all to one card, then that’s even better.
If you don’t have a low-interest card, you may apply for one. Don’t forget to read your card terms to avoid pitfalls such as hidden charges.
You may find learning how to consolidate debt easier with a credit card than a personal loan. If you have a good credit standing, you’ll get excellent credit terms. You may even get interest rates as low as 0%.
That said, moving credit card debt is different than eliminating it. Any low-interest rates offered are, in most cases, conditional and time constrained. Be aware there will most likely be transfer fees that will accrue interest alongside the transferred debt. Credit card transfers are only ideal for transferring a debt to a low-interest card.
If you can, make an aggressive move toward your monthly payment. Pay more than the minimum amount. Do this while interest rates are still low. It can translate into smaller final payoff amounts.
Meticulously plan your action, so history doesn’t repeat itself with the transferred debt.
The easiest way on how to consolidate debt is to use 401k loans. You can borrow against your 401k as long as the loan is in compliance with the company rules.
You may no longer need credit checks, and you can make repayments straight from your paycheck. A 401k loan is essentially borrowing from yourself.
The downside is, if you don’t pay the money back, then it can affect your retirement fund.
It’s important to note 401k loans count as income and are subject to taxes and penalties.
Home Equity Loans
Also known as cash-out refinancing, home equity loans are a good idea when you have at least 20% in equity and are positive you can repay the debt. They are the similar to 401k loans since you can borrow from your assets.
You’re able to pull money from the equity in your home without the need to sell. Moreover, because you have concrete collateral, lenders are more likely to approve your loan application.
Interest rates tend to be only 3% to 5% and are usually tax deductible. The obvious downside is, that if you do not pay the loan, you can lose your home.
You can also significantly increase your debt-to-income ratio. However, it may be harder to qualify for other types of debt later.
Life Insurance Loans
Knowing how to consolidate debt using your life insurance is important when you don’t qualify for any of the options above. You can borrow up to the cash value of the policy. In some cases, repayment is not necessary.
Upon your death, however, the policy’s overall value goes down if you have not paid your loan.
Debt Counseling Agency
A debt counseling agency can provide you with plenty of ways on how to consolidate debt. It can help you negotiate better terms and sometimes lower your existing debt. You only need to make one monthly payment to the agency, and they take care of repaying all your creditors.
A debt counselor can help you draft a debt consolidation plan good for at most five years. Remember, though, you must qualify by income.
You may not be able to apply for additional credit cards while on the program as well. The good thing is you can focus all your energy toward consolidating your debt and eliminating it completely.
Educating yourself on how to consolidate debt can do wonders to your credit score – but then, what is it? Learn what it is in this video from Wall Street Survivor:
Debt can feel like a storm cloud over your head. When you know how to consolidate debt, however, you will gain a silver lining. The process can be long, but with determination and commitment, you can succeed.
Have you tried debt consolidation? Which option did you choose? Share your experiences with us in the comments below.
Up Next: Debt Consolidation FAQs
Editor’s Note: This post was originally published in February 2018 and has been updated for quality and relevancy.