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Consolidate Debt
Next to winning the lottery, a debt consolidation loan is a debtor’s dream. You can consolidate debt with one monthly payment and a fixed monthly payment schedule, and actually see an end to those monthly payments.
In reality, consolidating bills isn’t always easy. If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate to consolidate debt. And if you’re not careful, you can end up deeper in debt than when you started.
When you consolidate debt, your goal should be to lower your overall costs. To accomplish this there are two things to keep in mind:
Here are some of the best ways to consolidate debt:
Consolidate Debt Using Credit Cards
The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. And since credit card issuers don’t require collateral, you aren’t “risking the farm.”
Call your current issuer to ask what interest rates they will offer you if you transfer balances from other cards over to theirs. Go for a fixed rate if you can get it, and ask them to waive any transfer fees. If you can’t negotiate a low rate with your current issuer, try shopping for a new card at a site such as CardRatings.com. But be careful! Too many applications for credit in a short period of time can hurt your credit rating.
Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3 – 5 years.
Consolidate Debt Using Home Equity Loans
With a home equity loan, you borrow against the value of your home, minus any other mortgages. The two major kinds to consolidate debt are: 1. A Home Equity Loan – a fixed amount of money for a fixed period of time (sometimes at a fixed rate) and 2. A “Home Equity Line of Credit” where you borrow up to a pre-approved credit limit (interest rates usually variable) and can borrow again if you still have money available.
These loans can offer attractive rates, low payments, and the interest is usually tax-deductible if you itemise. Many issuers offer no or low closing costs for these loans. Interest rates are often variable, however, and there’s always the risk that you can lose your home if you can’t pay.
Consolidate Debt Using Cash Out Refinance
Refinancing your home and taking out money to pay off bills (called “cash-out refinance”) is yet another way to tap the equity in your home and consolidate debt. If you can refinance at a substantially lower interest rate, you’ll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low.
One option to consider is an interest-only loan. By lowering your monthly payment, you can free up money to use toward paying down other high-rate debt or building a retirement fund.
Make sure you understand the total cost of refinancing, if you decide to consolidate debt in this way. Take any money you’ve freed up by paying off other bills and use that to create an emergency savings fund.
Consolidate Debt Using Traditional Debt Consolidation Loans
A debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lender’s security is you. Because lenders consider them risky loans, they’re usually more expensive and not always easy to get if you have a lot of debt.
If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method to consolidate debt. However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate.com for current averages). Remember, to calculate the total cost of the loan from start to pay-off.
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Credit Counseling
Credit counseling agencies may help you get out of debt, though they don’t actually consolidate your debt. Instead, payment plans (usually with lower interest and fees) will be worked out for all of your eligible debts. You’ll make one monthly payment to the counseling agency, which will pay all your creditors.
Participating in a credit counseling program generally won’t hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years. But be careful which agency you work with. If the counseling agency pays your bills late, you’ll pay the price since you’re still responsible to the lender. It happens!
Debt Settlement
Debt settlement is another way to consolidate debt that’s become increasingly popular with consumers who have a lot of debt and can’t, or won’t, file bankruptcy. You stop paying your bills and instead make a regular monthly payment to the settlement company. Your creditors contact them, and not you, about your overdue bills. As your accounts fall further behind, the negotiation company will settle your balances – usually for 50% of the balance or less (including fees) depending on the debt. Most people can be out of debt in less than two years or less using these programs.
It’s not perfect. Your credit rating will be hurt in the short run and you must be certain you’re dealing with a reputable company or the money you pay each month could disappear. Still, for consumers who can’t shoulder the burden of debt they have now, it can be a very good option.
Retirement Loans
If you have a 401(k), 403(b) plan or certain types of pension plans, you can borrow against your nest egg and consolidate debt. (You can’t borrow against your IRA.) It’s easy, with no income qualifications or credit check.
The key here is to borrow against your retirement account to consolidate debt, rather than withdraw from it early, so that you don’t end up paying taxes and a 10% penalty. Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal.
These loans typically offer low interest rates, and interest is paid to you, since you are the lender. While tapping your next egg like this can short-change your retirement, so can costly debt payments. If you are in your 20’s and 30’s, you obviously have more time to rebuild a retirement nest egg, but even if you’re in your 40’s or 50’s, you will want to weigh the cost of paying the high interest of the debts over time, versus borrowing from your retirement account. The return you get from paying off high-rate debts is guaranteed – while the stock market isn’t.
Rapid Repayment
There is a mathematically optimal way to pay your debts. Choose a fixed level monthly payment, and commit to it each month. Pay as much as you can on the highest rate debt first, while paying the minimums on the rest.
It is almost always suggested that consumers with debt start by creating one of these plans to consolidate debt. Many people who do so find they don’t even need to consolidate debt to become debt-free in the next few years. They just need a plan and they can do it on their own.
Overview
The biggest mistakes people make when it comes to consolidate debt are:
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Copyright 2006. © Consolidate Debt |
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