One of the smartest strategies for dealing with potentially overwhelming debt, consolidation can make your load easier to carry by combining all of your obligations into one financial instrument.
This gives you a single monthly payment rather than multiple ones. It can also mean interest rate reductions, which can result in significant savings over the lifetime of your repayment process.
So, what is the best way to consolidate debt?
Let’s look at some options.
Credit Management
The beauty of this approach lies in the fact that it can be done without taking on new debt. Rather than getting a loan, you’ll place your debts in the hands of a credit counselor, who will negotiate lower interest rates and fee reductions (sometimes even fee forgiveness) with the people you owe.
This will make your debts easier to repay, plus you’ll make your payments to the counseling agency, which, in turn, will pay your creditors on your behalf. The downside is counselors charge a fee for this service and you might be required to agree to abstain from applying for new credit — as well as using your existing accounts — until the program is complete. Further, some management programs will require you to close accounts altogether.
Balance Transfers
If your credit score is still strong, you might qualify for a new credit card with a limit high enough to absorb your outstanding obligations. This places all your bad eggs in one basket, which means you’ll pay one bill each month to keep them all in check.
This can be a good deal if you can find a card with a zero percent introductory interest rate — and pay off the balance before the rate expires. However, you could wind up facing an even higher interest rate than you had before if you don’t — plus there are usually annual fees associated with cards of this type.
Personal Loans
Many financial institutions offer loans to consolidate debts into a single vehicle. Credit unions in particular are good for this as they offer their members favorable rates — even if their credit scores have taken a bit of a hit. Banks can be favorable as well, though they typically want to see a credit score in the good to exceptional range.
You could encounter loan origination fees of up to eight percent of the loan amount, so you’ll need to take that into consideration before accepting one of these offers. If you decide to go the credit union route, you’ll also need to join before they’ll grant you a loan.
It’s worth noting debt settlement companies sometimes offer consolidation loans on a select basis. Before signing up with a debt relief firm, you’ll want to be careful to ensure you’re signing up with a reputable organization. Reading through other consumers’ firsthand experiences, like this national debt relief company will help you gauge a company’s reputation and track record.
Home Equity Loan or Line of Credit
If you own your home and its value is significantly higher than the outstanding balance of your mortgage, you can tap into the difference for whatever purpose you desire by taking out second mortgages. The advantages here include a longer repayment period, which can mean lower monthly payments. The interest you’ll pay will be tax-deductible too. What’s more, you can usually get one of these loans even if your credit history is less than stellar, because the loan will be secured by an interest in your property.
Which brings us to the biggest downside of this approach.
If you default on this type of loan you can be forced to sell your house to repay it. You’ll also encounter appraisal costs, loan origination fees and closing costs so you’ll need to make sure you’ll still come out ahead when all of those factors come into play.
Borrowing from Insurance Policies
A life insurance company will loan you money up to the cash value of the policy if you have sufficient equity in it. Further, you won’t have to repay it, as long as you keep making payments on the policy and the loan is less than the cash value of the policy. However, your death benefit will be forfeited if you don’t, which means your family will be on the hook for your final expenses.
So, there you have it.
Each of these methods has pros and cons. Ultimately though, the best way to consolidate debt is the one most suited to your circumstances. Whatever you choose to do, it’s important to remember that consolidation simply bundles your debts — it doesn’t eradicate them. Depending upon the consolidation method you choose, you could also be left holding a stack of credit cards with zero balances. Don’t fall for the okie-doke and run them up again.