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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