A Quick Guide To Consolidating Debt

If your debt is now controlling your life, you need a surefire way to get yourself back on track. Debt consolidation can be an effective solution — if you know what you’re doing. Here’s a quick guide to consolidating debt.

What Is Debt Consolidation?

This approach entails taking out a loan to cover high-interest debts such as credit card obligations. Consolidation makes bill paying simpler since you have only one payment to make of the same, usually lower amount, as opposed to multiple payments of varying amounts and due dates each month.

Also, for debt consolidation to make sense, your loan will have an interest rate that’s lower than what you’re paying on your plastic. This will save you cash.

A Quick Guide To Consolidating Debt

However, debt consolidation comes in several forms. Let’s explore some of them.

Balance Transfer

With a balance transfer card, you can move high-interest balances from credit cards to one that offers a low or 0% APR for an introductory period, usually a year to 18 months.

This kind of debt consolidation works optimally when the issuer offers a low transfer fee, which can range between 2% and 4% of what you transfer. 

Note that while 0% interest cards are the most desirable, you don’t necessarily need one that low to benefit. If the interest rate on a transfer card is lower than that of your other plastic, you’re going to save money.  

After you’ve transferred your balance, be sure you can pay it off before the promotional period ends and the interest rate shoots back up to the regular rate. You also want to avoid adding new debt to the card after you’ve shifted the balance.

Home Equity Loan or Line of Credit

If you own your home, you can leverage the equity to get out of your debt morass. These kinds of loans usually carry relatively low interest, mostly because your house is on the line as collateral. Mess up, and you could lose your home.

The difference between a loan and a line of credit is that the loan goes away when you’re done repaying it. Meanwhile, you can keep using your line of credit as you pay off the balance.

A home equity loan or line of credit could be a great way to make the most of your home’s value if you qualify and your income is stable, because again, mess up, and you could lose your home.

Debt Consolidation Loan

A consolidation loan, which is a personal loan, permits you to supplant your credit card debts with a single debt. You usually need a good credit score, particularly if you seek a relatively low-interest rate. But you don’t need to put up an asset such as your car or house for collateral. 

You make a single payment, making it simpler to manage your finances. If your debt is spread out over a greater amount of time, your monthly payments are more manageable.

Before you take out such a loan, though, calculate how much you can afford to pay monthly. Doing so will help you decide on the loan and repayment plan that’s best for you. Examine your budget to see if there are areas in which you can cut back.

Make An Informed Choice

There is a lot of info available about your options, but don’t let that paralyze you into inaction. Also, when checking out your options, be wary of scams. Read reviews and check with your state’s attorney general and local consumer protection agency for complaints. Steer clear of agencies that request cash during the application process. You also should never feel pressured.

So, there you have it – a quick guide to consolidating debt. Size your options up against your personal situation, and you’ll be back on a better financial path in no time.