5 Methods of Consolidating Your Debts the Smart Way

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(Newswire.net — February 27, 2021) —

Sometimes, life can be unpredictable. Even if you’ve managed your finances the right way, some disasters can catch you unaware, and before you know it, your debts are piling up, and it becomes difficult to keep up with the payments. If you can’t keep up with your debt repayments because of one reason or the other, it’s time to look into debt consolidation.

Debt consolidation is the process of taking a single loan or credit card and using the money to pay off multiple credit card balances and loans. The two types of loans that are mostly consolidated are student loan debt and credit card debt. You can also use debt consolidation for medical bills, payday loans, or personal loans.

Consolidating your debts can relieve some of the pressure in your budget, reduce the number of creditors you pay every month, and lower your monthly payments, saving you money and interest. Here are the different options you can use for debt consolidation. Weigh the pros and cons and choose the one that’s fit for your situation.

  • Home equity/mortgage refinancing

If you’re a homeowner, consolidating your debt with a home equity loan or line of credit (HELOC) is the best option. Home equity loans offer low interest rates than most loan types because you’re putting your home as collateral. In other cases, you can refinance your mortgage for a bit more than you owe and use the difference amount to pay off your debts. However, both of these options are risky because you’re converting unsecured debt into secured debt.

If you stop making payments on your credit card, personal loan, medical bills, or any other debt, your creditors may sue you and attempt to collect the unpaid balance. They may be successful; they may not. However, even if the suit is successful, the worst that can happen is the court may garnish a percentage of your wages or place a lien on your property.

The same as mortgages – home equity is secured by your home, which means if you fail to make the minimum monthly payments, your lender can foreclose your home. Until you pay off your loan, the bank has the legal right to the value of your home and can possess it once certain conditions are met.

Using home equity to consolidate your debt, though it’s an inexpensive way to consolidate debt, should only be considered an option if you have sufficient cash flow to meet the monthly payment requirements. If you can’t, then it’s not worth risking the roof over your head.

  • Personal loan

Personal loans are unsecured debt. Since the loans aren’t backed by collateral, your credit score will determine the rate you pay. They are an excellent option for consolidating multiple loans if you have good credit.

You can get personal loans through banks, private finance companies, peer-to-peer lenders, credit unions, or online lenders like Snappy Loans. With excellent credit, direct online lenders will offer great rates, fast approval, and prompt delivery. 

With poor credit, direct online lenders will also provide you the best chance of approval by providing less money with a higher interest rate than you’re already paying, which defeats the benefit of debt consolidation.

  • Balance transfer credit cards

If you want to consolidate your credit card debt and only owe a modest amount, a zero-percent transfer credit card may work for you. However, approach this option with caution. Credit card balance transfers are the best when you owe no more than a few thousand dollars. The zero-percent rates are offered only for a set time, usually between one to two years. 

If you fail to pay the balance in full by the time the offer expires, then the remaining balance is subject to the credit card’s regular interest rate, which is usually very high. Most companies charge a balance transfer fee between three and five percent of the balance transferred.

Before you consider using the zero-percent transfer offer, ensure that you read all the fine print and understand all the details. Work out the payment schedule you need to ensure you pay your balances in time before the offer expires. If you want to be safe, plan to pay the total off at least a month before the deadline. 

  • Student loan consolidation

Most people graduate college with many student loans. These loans usually vary in interest rates and repayment periods. Keeping track of them can be a hassle, and consolidating them is the best option and will put you in a better financial position.

If you only have federal student loans, consider consolidating them using a direct consolidation loan through the US Department of Education. They can also give you access to some additional loan repayment plans and some loan forgiveness programs. Consolidating them will also remove the uncertainty of variable rate loans into a fixed-rate product. However, before doing so, ensure you look at your current loan’s terms, and ensure you won’t lose any credits or benefits by transferring your balances into one loan.

Consolidating your loans through private lenders, also known as refinancing, could help you get better interest rates but may be hard to qualify. If you only have personal loans, consolidating them through a new private lender will work much better.

  • Debt consolidation companies

Debt consolidation companies operate under different names like debt management, debt consolidation, credit counseling, etc. These companies should be your last resort. If your credit is bad, you can use these firms to help you keep out of bankruptcy, but it will cost you.

The companies don’t consolidate your debt into one; instead, they act as the middleman between you and your lenders. You send one monthly payment to the company, and they distribute it among your credit card debt and other loans. Sometimes, they can even negotiate lower interest rates and minimum fees with your creditors.

Using these companies may affect your credit because your lenders will report to the credit bureaus that you’re repaying debt under modified terms. Their fees are costly, so consider using them as your last option.