The Best Ways to Consolidate Debt
Next to winning the lottery, a debt consolidation loan is a debtor’s dream. You’ll have one monthly payment - and hopefully be able to finally pay off those debts. 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. 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.
With a home equity loan, you borrow against the value of you home, minus any other mortgages. The two major kinds 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, 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. 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. 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.
