How to consolidate your debts?

Caught in the quicksand of having too much debt? Consider debt consolidation! No, it won’t make all your debts disappear all of a sudden – but you will have only one affordable monthly payment instead of several ones to worry about. Debt consolidation is a great financial tool to cut down your borrowing costs and improve your financial health. Isn’t it what you are looking for?

To consolidate or not to consolidate?

Debt consolidation is the act of combining several loans or credit card balances into one payment. Its main aim is to lower interest rates and get out of the debt faster. You can also extend your terms and reduce your monthly bills. 

Debt consolidation makes your household budgeting easier because you replace many payments with only one. And you won’t need to deal with several harassing creditors and suffer from debt stress.

But keep in mind that your debt, even at better terms, will be still there. Debt consolidation works similar to sorting dirty laundry: you are just moving clothes from several piles to one. So you have to be diligent about paying it off and manage your money wisely. 

What options do you have?

The choice depends on your particular financial situation, aims and the amount of debt you have. Decide what you want to achieve with debt consolidation - to lower your interest rates, reduce your monthly payments or just stretch out the terms? 

Credit card balance transfers

If you have several credit card debts, you can move them onto one less-costly balance transfer plastic. Thus you can eliminate your debt without losing money on high interest charges! 

Balance transfer deals usually come with a low or zero introductory APR for a fixed period of time. When the introductory period is over, you will be switched to a regular ongoing APR. So try to pay off your debt in full – or at least the largest portion of it – within the interest-free period.  

Be attentive to the limit of your new credit card – if it is not high enough to accommodate your debt fully, you will have several debts instead of only one. It’s not your aim, right? 

Home equity loans

A home equity loan is a fast and simple way to consolidate your debts. In fact, a lot of debt consolidation loans are home equity loans or second mortgages. 

A home equity loan has the advantage of carrying a low interest rate which is generally tax deductible. The downside is that the collateral for the loan is your house. If you can’t pay the loan back, you could end up losing your house. 

Personal loans from credit unions

If you have a positive credit score, you may apply for an unsecured loan from a credit union. They typically provide reasonable interest rates. However, don’t expect very attractive figures – your APR will be over 12%. 

Another type of unsecured loans is a payday loan. It is not a good solution for you. Payday loans are targeted to cover urgent financial needs. They are expensive to use, especially if you are going to take a payday loan for a long period of time.

Withdrawals from your 401(k)

Most employers allow making withdrawals from a 401(k) or other retirement plan. Use this option only if you have no other choice. Remember, the funds in your 401k are reserved for your retirement years. Using them now to solve your financial problems, you may cause another crisis for you in future. 

A non-profit consumer credit counseling agency

Another option is to get confidential debt management advice from an organization like National Foundation for Credit Counseling (NFCC). It has branches throughout the country. They can contact your creditors and reduce your interest rates. Rather than consolidating debts, credit counselors will work out a debt-management plan for you. 

Whichever option you want choose for debt consolidation, make sure that your will change your spending habits and the way of life. Try to understand why you have accumulated a heavy debt. Maybe you need to cancel some credit cards or plan your expenses in advance?

If you use one of these options but then still overspend, you will find yourself back in the same financial situation again. However, next time your choice of options can be restricted to just one – bankruptcy.