The pros and cons of some of the best ways to consolidate debt
8 Ways to Consolidate Debt
by Gerri Detweiler
Using a Personal Loan to Consolidate Debts
Debt Consolidation Calculator
Is Debt Consolidation a Good Idea?
Next to winning the lottery, a debt consolidation loan is a debtor's dream. You'll have one monthly payment and finally pay off those bills. 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 decent interest rate. And if you're not careful, you can end up deeper in debt than when you started.
Here are the pros and cons of some of the best ways to consolidate debt:
Using Credit Cards
Call your card issuers and ask them what rate they can give you to transfer balances from other cards. Aim for fixed rates and no transfer fees when possible. Alternatively, use a site like CardRatings.com to shop for a new low-rate card to consolidate.
Pros: Low interest rates and no collateral
Cons: May be traps hidden in low rates and requires a decent credit rating.
Home Equity Loans or Lines of Credit
Get a low or no cost loan tied to the equity in your home. In many cases, homeowners can borrow up to 90 to 95% of the value of their home, minus any first mortgage.
Pros: Attractive interest rates and interest is usually tax deductible.
Cons: Adjustable interest rates and interest-only loans may be somewhat risky. You can lose your home if you miss payments.
Cash Out Refinance
Refinance your current mortgage, and if you have equity available, take "cash out" to pay off other debts.
Pros: Low interest rates and the interest is usually tax deductible. Interest-only or adjustable rate mortgages can significantly lower monthly payments.
Cons: Cost of refinancing may be 4% or more of the total loan amount, higher payments can put your home at risk.
Traditional Debt Consolidation Loans
Get an unsecured loan from a local bank or lender to pay off other debts.
Pros: No collateral or homeownership required.
Cons: Interest rates may be somewhat high and it's very hard to find if you have much debt or a poor credit rating.
Ask a non-profit counseling agency to help structure repayment plan with unsecured creditors. You make one monthly payment to the counseling agency, which pays participating creditors.
Pros: May offer lower interest with fees waived. Can improve your credit if you stick with the program.
Cons: Not available for all types of debts. Must choose reputable agency, or risk late payment or other problems.
Debt Negotiation or Settlement
Hire a settlement company to negotiate lump sum settlements on your debts usually 50 to 60 cents on the dollar or less (including fees). The settlement comes from monthly amount you pay to settlement company after you stop paying your creditors.
Pros: End creditor harassment, avoid bankruptcy, and usually can be out of debt in 18 to 24 months.
Cons: Short-term damage to credit rating, and some types of loans not eligible. Must choose reputable agency.
Borrow against the money in your 401(k), 403(b) or pension plan, usually up to 50% of the balance.
Pros: Easy to get with no credit check or income qualifications. Low interest, paid to yourself.
Cons: May shortchange retirement by keeping it out of investments. May have to pay back debt if you leave job before loan is repaid.
Calculator: Should I borrow from my 401(k) plan?
Create a rapid repayment schedule based on mathematically optimal way to pay your debts. Pay the highest interest rate debt off first, then move down the line.
Pros: Inexpensive, often gives consumers alternative to debt consolidation.
Cons: May not offer enough relief if you have substantial debt. Need to update plan as rates and terms on loans change.
Would you like to
pay off your credit cards
in less time
for less money?
The biggest mistakes people make when it comes to consolidation are:
- Not having a plan for paying the debt off after they've consolidated, and
- Procrastination. Waiting for the "perfect" solution to come along almost always means you'll end up deeper in debt. Choose your approach, and start getting out of debt today!
Gerri Detweiler is the author of Slash Your Debt, Save Money & Secure Your Future and founder of DebtConsolidationRX.com. Copyright Gerri Detweiler, all rights reserved.
Take the Next Step:
- Stop struggling financially. Take these steps to get out of debt and begin the journey to financial freedom!
- Stop struggling to get ahead financially. Subscribe to our free weekly Surviving Tough Times newsletter aimed at helping you 'live better...for less'. Each issue features great ways to help you stretch your dollars and make the most of your resources. Subscribers get a copy of Are You Heading for Debt Trouble? A Simple Checklist And What You Can Do About It for FREE!
Debt from my past is preventing me from saving for my future! Tell us: Yes, debt is hindering my ability to save and I could use help dealing with it! or No, debt is not a problem but I am trying to get ahead financially!
More Money Tips & Tools
- Could you be losing thousands of dollars a little at a time?
- Is your financial behavior rational? Or not?
- Avoiding the 'same as cash' trap
- Saving-money secrets of the rich and frugal
- 5 low-risk ways to earn higher interest now
- How to save money fast
- 7 IRA withdrawals that don't trigger a penalty
- This week's Readers' Tips