Consolidating debt is an ideal way to reduce your amount and tenure of debt. You make a single payment to one lender on a certain date and this will help you clear off the debts faster. But the fact remains that debt consolidation is not easy all the times. If you owe a lot of money, obtaining a consolidation loan at the lower rate of interest can be difficult. Choosing a high interest loan can increase your debt.
The primary aim to consolidate debt should be to reduce your total costs. To achieve this, you have to consider the following two points:
-Shop around for the loan with the lowest interest rate.
-Chalk out a strategy to clear off the debts in 3-5 years.
The following are some of the best methods of debt consolidation:
1) Credit Cards: If you have good credit rating, you can get a card offering lower interest rate than other types of consolidation loans. Besides, you do not have to deposit any collateral, making it virtually risk-free credit. Find out from the current issuer the interest rate they are willing to give you, for balance transfers from other cards to their cards. Choose a fixed rate if possible and request them not to charge transfer fees. If that is not possible, look around for another card. Many sites offer you a wide choice of cards with different interest rates. But do not apply for plenty of applications simultaneously as it can damage your credit rating. Once you get a card, draw a repayment plan to clear your debts within 3-5 years.
2) Cash Out Refinance: Another way to utilize the equity in your home is refinancing. Look out for the lowest rate of interest to reduce your debt burden. Sometimes, you end up paying lower amount than what you were paying before refinancing. Taking an interest-only loan will allow you to free some money which can then be reutilized for paying off the other debts with high interest. Calculate the total cost of refinancing before starting up.
3) Traditional Debt Consolidation Loans: These loans are one of the most expensive ones in the market. The lenders do not ask for any kind of security from you and so end up taking higher risk. To compensate for that, they charge you higher interest and lend only to the people with little debt. Due to the higher rate of interest and the increased tenure of loan, do not go for this method if your liabilities are high. But if your debt is small, this is an excellent way to save your money. Before applying for the loan, compute the total cost of the loan.
4) Credit Counseling: Here you learn the tips and tricks of eliminating debt but it will not consolidate your debt. Counseling is done by agencies, which help you design a payment plan with reduced interest and fees. You pay money once a month to the counseling agency, which will pass it on to your creditors. Your credit rating will not be affected if you go for credit counseling and you want to eliminate debt within 3-6 years. But check out the credentials of the company as there are many companies who hold on to your payment instead of handing it to the lender. This can harm your credit rating.
5) Rapid Repayment: If you do not want to consolidate your loans this is the best method to get out of debt. Set a limit of monthly payment every month and stick to it. Pay the maximum amount toward your debt with highest interest and pay the minimum on the others.
6) Retirement Loans: Instead of stopping your pension plans early, you can borrow against them. This will avoid taxes or penalties incurred for premature withdrawal. Besides, if you stop working or are unemployed you will have to repay the loan immediately or else face penalties and taxes. Certain types of pension plans allow this facility. There are no income requirements or credit checks. The interest rates are low and you earn interest as you have borrowed money against your own fund. Though your fund will be reduced considerably, you can rebuild it again over a period of time if you are young. Compare the pros and cons of this method against high interest debts if you are middle-aged or are approaching middle-aged. The money saved by clearing off high interest debts is guaranteed but the returns from stock market are not assured.
7) Debt Settlement: If you are having huge debts but cannot or will not pay, apply for bankruptcy. You do not pay your bills to your creditors but make a single payment each month to the settlement company. Your lenders will ask for the payment from this company. When your level of debt reduces substantially, the settlement company will negotiate with your lender to settle your account. The settlement does not exceed 50% of the balance outstanding. This will let you clear off your debts within 2 years. But the major drawback of this method is the damage caused to your credit rating. Ascertain the reputation of the company before using their services.
Home Equity Loans: When you take a loan against the value of your home and subtract any mortgages, it is called home equity loan. They are two types:
1) A Home Equity Loan where you get a certain sum of money for a certain time and at sometimes at a pre-determined rate.
2) A “Home Equity Line of Credit” allows you to take a loan within a pre-approved credit limit at varying interest rates. If the amount borrowed is less than the credit limit, you can take more funds.
These loans come with lucrative interest rates, low monthly installments and tax-deductible interest if you itemize the loan. There are zero or low charges for closing these loans. The rates vary and there is a big risk of losing your home if you cannot pay the loan.
Conclusion: Do not make the following blunders when you are consolidating debts:
- Absence of plan to clear off the consolidated debt.
- Procrastination or waiting till the ideal solution comes along. This will increase your liabilities.