Debt can feel like a noose around your neck. Multiple creditors, different payment amounts, and due dates can make it difficult to keep track of everything. Consider these 5 debt consolidation options to simplify your life if you are considering debt consolidation.
Debt consolidation can be a great way to save money on interest, pay off debts faster, and simplify your finances. However, there are several different ways to consolidate your debts, so it’s important to choose the right one for you. This guide will help you understand the different options available and how to choose the best one for your needs.
1. Balance Transfer Credit Card
Are you tired of paying high-interest rates on your credit cards? A balance transfer card could be a great option for you. These cards offer zero interest or very low-interest rates for an introductory period, typically up to 18 months. This means you can save money on interest and pay down your balances more quickly. Just be sure to pay off your entire balance before the promotional APR period ends, or you could end up paying even more in interest than before.
There are a few things to consider when choosing a balance transfer card. First, make sure the credit limit is high enough to cover the balances you’re transferring. Second, look for a card with a low annual percentage rate (APR) to make the balance transfer worth your while.
| Pros | Cons |
|---|---|
| – Quicker and easier to get than many other loans – The intro period is a great time to save money on your debt. – No collateral is required, so there is no risk of losing assets | – Does not address any poor spending habits that caused the debt – A typical fee of 3 to 5% of the amount transferred on top of the balance – APR after the intro period is likely higher than other loans – A hard pull on your credit report |
Balance transfer credit cards can be a great way to save money and pay off debt, but only for those who are disciplined enough to avoid running up new debt on their existing credit cards. Once the balances have been shifted to the new card, it’s important to havethea plan to pay off the debt before the credit card’s introductory rate expires.
2. Home Equity Loan Or Home Equity Line Of Credit (HELOC)
Are you struggling with debt? Are you tired of paying high-interest rates on your credit cards? A great way to consolidate your debt is to take out a loan against the equity in your house.
The equity in your house is the difference between the appraised value of your house and how much you owe on your mortgage. So, for example, let’s say your house is worth $250,000 and you owe $100,000 on your mortgage. That means you have $150,000 in equity that you can use as collateral for a loan.
Many people use this money to pay off their high-interest debt, such as credit cards. Taking out a loan against the equity in your house can be a great way to consolidate all of your debts into one monthly payment at a lower interest rate. Plus, since your house is used as collateral for the loan, the interest rate is often tax deductible.
| Pros | Cons |
|---|---|
| – Fixed-rate and fixed monthly interest for home equity loans – Larger loan amounts – Long repayment terms – Lower interest rates than credit cards or personal loans – Variable rates for HELOCs | – Home is the collateral that secures the debt – Interest on the loan is not tax deductible – Longer funding timelines on average – Longer repayment timeline can mean higher costs overall |
There are many benefits to opening a HELOC, especially for those who have significant equity in their home. A HELOC typically has a much longer repayment timeline than other types of loans, which can be a major advantage for borrowers. Additionally, interest rates on HELOCs are often very competitive.
3. Debt Consolidation Loan
Debt consolidation loans can be a lifesaver when it comes to getting your finances under control. One monthly payment and a lower interest rate can make all the difference when you’re trying to get out of debt. However, these loans are unsecured, so your interest rate and borrowing limit will depend on your credit profile.
| Pros | Cons |
|---|---|
| – Collateral is not required – Funding and approval can be fast from many lenders – Loan amounts range from $1,000 to $100,000 – Lower interest rates than credit cards in many cases | – Loans can come with fees for origination, late payments, and prepaying early – Low rates require excellent credit – Scams are rampant in the debt consolidation loan marketplace |
Debt consolidation loans can be a great option for those with a good credit score who can secure favorable interest rates and a borrowing limit that covers all of their debts. However, you will usually need a credit score in the mid-600s or higher, and a history of making on-time payments, to get the best rates. There are also bad credit personal loans available.
4. Peer-To-Peer Loan
P2P lending platforms provide an opportunity for borrowers to obtain loans from individual investors, rather than from financial institutions. These loans are typically unsecured, meaning that they do not require collateral, and can range from $25,000 to $50,000. Your credit history is the primary factor that will affect the terms of your loan, including the interest rate and borrowing limit. Individuals with higher credit scores will generally be able to obtain better terms.
| Pros | Cons |
|---|---|
| – Application, approval, and funding are generally fast – The initial application uses a soft credit check – Lower credit scores may still qualify | – Fees may apply – High-interest rates with bad credit – Less time to repay the loan than with credit cards and home equity loans – Potentially higher monthly payments because of shorter repayment terms – Rates are generally higher than those on home equity loans |
There are many different types of loans available to borrowers, each with its own set of requirements. Some loans, such as peer-to-peer (P2P) loans, have less stringent criteria than others. This can be beneficial for borrowers who may not qualify for a traditional loan. Before taking out any loan, it is important to compare fees, interest rates, and other terms. P2P loans may be a good option for borrowers who are seeking a fast loan or have a limited credit history.
5. Having a Debt Management Plan
There are many debt consolidation options available that don’t require taking out a loan or applying for a balance transfer credit card. A debt management plan may be the right solution for you, especially as an alternative to bankruptcy. With a debt management plan, you work with a credit counseling agency to develop a repayment plan that fits your budget.
A debt management plan is a great way to get your finances back on track. You work closely with a nonprofit credit counseling agency or debt relief company to come up with a plan to pay off your creditors. All of your credit card accounts are closed and you make one monthly payment to the agency, which then pays off your creditors. Although you still receive billing statements from your creditors, it’s easy to track how quickly your debt is being paid off.
| Pros | Cons |
|---|---|
| – Credit scores can improve over time – Free options from some organizations if you need it – Some of the best loan rates | – Credit scores will generally lower for a while – Many non-profit organizations have strict requirements on how you use money while you go through the plan |
Debt management plans can be a good option for those who are struggling with a lot of debts and need help in structuring their repayments. But it is important to find out whether your debts qualify for this type of plan.
Keeping Yourself Out Of Debt
Debt consolidation may seem like the easy way out, but it’s important to take a hard look at your spending habits first. Celeste Collins, executive director of OnTrack WNC Financial Education & Counseling in North Carolina, says that you need to identify where the debt came from. “How did this balance get there? You need a comprehensive cash flow plan and to get serious about paying this down,” she advises. Taking a close look at your finances and making a plan to pay off your debt is the best way to get back on track.
When you’re out of debt, you can avoid it in the future. Here are some guidelines:
- Set a budget and stick to it. Live within your means.
- Avoid impulse purchases.
- Shop around for the lowest price before making a big purchase.
- If you use a credit card, pay off the balance each month to avoid interest charges.
- Keep your finances organized and keep a close eye on your bank balances.
- Stay away from “buy now, pay later” and “interest-free financing” offers, which just defer your debt.
- Save money. Try to set aside a certain percentage of your income to be swept into savings.
Final Thoughts
Debt consolidation can be a great way to save money and get your finances in order. But with so many options out there, it can be tough to know where to start. That’s why it’s important to do your research and compare different lenders’ interest rates, loan terms, and fees. And while subprime lenders may be an option for those with bad credit, they typically charge higher interest rates and have stricter loan terms. So it’s always worth shopping around with traditional lenders first.
When you’re considering taking out a loan, make sure you research the lenders to confirm they are legitimate. You can visit their websites, read customer reviews on the Better Business Bureau, and check their registration status with your state’s attorney general’s office. This will help ensure you have a positive experience with your loan.