8 Ways to Consolidate
Debt
Next to winning the lottery, a debt
consolidation loan is a debtors dream. With one monthly payment and a fixed monthly payment schedule, you
can 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. And if you're not careful, you
can end up deeper in debt than when you started.
Your goal in consolidating your debt should be to lower your overall costs. To accomplish this
there are two things to keep in mind:
1. Get the lowest interest rate possible
2. Have a plan to pay off your debts in 3 - 5 years.
Here are some of the best ways to consolidate:
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. Home Equity Loans
With a home equity loan, you borrow against the value of you home, minus any other mortgages.
The two major kinds are:
*A Home Equity Loan - a fixed amount of money for a fixed period of time (sometimes at a fixed
rate) *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 itemize. 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.
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. 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: 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. Take any money you've freed up by
paying off other bills and use that to create an emergency savings fund.
Traditional Debt Consolidation
Loans
A debt consolidation loan is an unsecured personal loan, and the only collateral you are
offering for the lenders 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 of consolidation. 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.
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 option 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.
Its 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. (You can't borrow against your IRA.) Its easy, with no income qualifications or credit
check.
The key here is to borrow against your retirement account, 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 nest egg like this can short-change your retirement, so can costly debt
payments.
If you are in your 20s and 30s, you obviously have more time to rebuild a retirement nest egg,
but even if you're in your 40s or 50s, 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 payment the
minimums on the rest.
I almost always suggest consumers with debt start by creating one of these plans. Many people
who do so find they don't even need to consolidate to get out of debt in the next few years. They just need a
plan and they can do it on their own.
About the Author and Publisher
Talbert Williams offers debt consolidation referrals
and advice. For more information, articles, news, tools and valuable resources on debt solutions, visit this
site: http://www.1debtfreedom.com
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