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List of Ways to Consolidate Your Debts
When multiple balances are wrapped into a single loan with a lower overall interest rate and more manageable repayment terms you will reduce your debt and that is what is called debt consolidation.
Without the help of a debt management company, you can consolidate your debts through various options.
Though you will still have the same amount of debt after the consolidation. Yet you will have rearranged your debt in a way that makes it easier to pay off. Let us look at various ways you can consolidate your debt.
Personal Loan
A personal loan is a type of unsecured loan that you can use for different reasons, including to consolidate your debt.
If you can qualify for a low annual percentage rate then it is one of the best options, in comparison to the overall rate on your existing debt.
Only your income and credit history will be used to qualify and you don’t have to keep any collateral.
Your loan will have a fixed payment amount if the loan is approved and a set repayment period, giving you a predictable payoff schedule.
Consider the repayment period and watch out for origination fees when you are shopping for personal loans.
When you spread your debt repayment over a longer period of time it can lower your monthly payment, however, you will pay more in overall interest.
Some lenders could add an origination fee, which is an upfront fee to the balance of your loan. When comparing loans look at the APR because it takes both the interest and origination fee into account.
If your credits are poor, or DTI is high then you may have a tough time qualifying or you may not receive attractive loan terms.
Credit Card Balance Transfer
When you have multiple credit card balances with different card issuers then qualifying for a credit card balance transfer can be a good option.
The application process is simple and you don’t risk any collateral, and the decision is taken within seconds.
The only drawback in this option to consolidate your debt is the 0% introductory APR that could last for a maximum of 18 months.
Related to other consolidation options it gives you less time to pay off the debt you transfer before the rate increases.
So we suggest you know beforehand about what the APR is going to be once the introductory period expires.
You also need to know that most cards assess a balance transfer fee between 3% and 5% of the amount you transfer, which could impact your ability to repay the debt by the end of the teaser period.
Making purchases on your balance transfer credit card must be avoided, more so when those purchases don’t qualify for a promotional rate, and you are not paying more than the minimum due every month.
If you have been making only the minimum required credit card payment, that amount will be directed toward your lowest-interest debt and purchases will accrue interest at the regular APR.
If your purpose is debt-consolidation then building up high-interest debt gets nullified.
Debt Consolidation Loan
An unsecured loan like a personal loan and credit card balance transfer is a debt consolidation loan, as said earlier a debt consolidation is used solely to combine multiple debts into a single balance and these loans could be offered by some major banks, credit unions, or online lending firms.
It is important to watch out for loans with a long repayment period with debt consolidation loans.
The extended repayment time results in more interest paid over the life of the loan even though these may have a lower monthly payment.
Predatory loans are also a concern. Because they may have short-term teaser rates that increase after a short period of time or excessive fees.
Home Equity Loan or Cash-Out Refinance
Another option is you can borrow against the equity in your home with a home equity loan or cash-out refinance.
Since the loan is secured by your home they have low interest rates and high borrowing limits. To determine whether you qualify for the low rates lenders consider your credit and financial history.
Cash from a home equity loan or cash-out refinance can be used by you to consolidate your debt but the high closing costs of these loans could negate the value of the lower rate.
Though this is a tempting alternative, it also poses other issues for tying consumer debt to your home, because the loan is secured by your home, if you fall behind on payments then you risk foreclosure.
Similarly, if your home falls in value, you could be, owing more money than your home is worth.
Borrow From a Life Insurance Policy
You could potentially use your permanent life insurance policy with cash value to reduce your debt to access your policy’s cash value you could use a few different ways.
As the rates are low and payments aren’t required on a regular basis you can take out a loan against the cash value in your policy.
If due to some unforeseen event of death the remaining debt will be deducted from the death benefit.
You may be able to withdraw a portion of the money directly, without having to repay it and without taking a loan and neither does it require any qualification or credit check.
You could also cash out your life insurance policy by discontinuing the policy in exchange for the entire accumulated cash value to consolidate your debt.
However, this is not a good idea because you lose the death benefit for your survivors, and will also owe taxes on the cash-out amount.
To understand your options consult a representative at your life insurance company, to know how the policy might be affected, and for avoiding a potential tax bill.
Conclusion
You will have numerous options to consolidate your debt if you have a steady income and good credit.
Similarly, you can restructure debt by yourself if you own assets such as a home, vehicle, life insurance policy, or retirement plan.
Seek help from a professional credit counseling agency or debt consolidating company so they can help you sort through your options.
If you’re struggling and have poor credit or few assets then you may need help from a professional agency if you can’t qualify for traditional options.
