While most people think a debt consolidation company is the only way to go, that’s not the case. For those who do believe this way, it’s important to take a look at other options.
It’s all going to depend on a few different things. What kind of debt do you have, how fast do you want it has gone and what’s your final goal? Let’s take a look at what you should be thinking about.
What is Debt Consolidation?
What does debt consolidation really mean?
It means you’re going to get one larger loan that takes care of smaller loans.
That means you only have to make a single payment each month instead of payments on each card. The idea is that things are going to be easier for you this way. Not only that, but you may be able to lower your interest rate and your monthly payment. That gets you paid up faster.
Keep in mind that consolidation and settlement are two different things. With a consolidation loan, you’re going to pay off your full debt and you’re not going to have negative effects on your credit.
1. Credit Card Balance Transfer
One of the most common ways that people consolidate debt is through a balance transfer. That means transferring the money owed to a single credit card with a lower interest rate. For those who are looking at this option, you’ll need to evaluate it first. Do you want to decrease your monthly payments? Do you want to pay off your debt more easily? Or maybe you want to decrease your interest rate? Are you looking for all of the above?
If you move all your debt to a single card with lower interest it can save you a lot of money.
You want to look for low interest or 0% interest, but check the length of that period. After all, 0% will generally only last 12-40 months. After that, you’re going to owe interest.
For consolidating to a new card you want to make sure that everything is done properly. That means transferring the balance and then double-checking that balance. You want to verify that the new card has a balance. You then want to verify that the old card has a $0 balance. Make sure you talk to someone on the phone and that you record their names. If you’re going to cancel a card this is even more important. You want to have a record.
Remember, transferring money to a new card can affect your credit score.
Because FICO looks at the amount you’re using on a card versus what you have available, you could see a change in your score. When you start paying down accounts it’s going to lower your credit utilization. But you’ll have a single card with a large balance when it comes to consolidation. That can lower your score. Still, if you have a lower interest rate you should be able to start getting rid of that debt faster.
2. Debt Consolidation Personal Loan
You may be able to get a loan with a lower interest rate. If that’s the case you can use it to pay off higher interest credit cards. Then you can start making the payments and getting rid of the debt faster.
These personal loans can come from just about any financial institution. You can even find them online. Just now that your credit is going to be a big factor in whether you get the loan and what interest rate you’ll have.
Personal loans give you a set payment for a set period of time. You’ll usually have somewhere from 3-5 years of payments to make, depending on your debt.
In some cases, you can get secured loans, with a CD or even a savings account used as a type of collateral. If you can get a much better rate on your savings you might want to go for it. Otherwise, you may want to just use the savings on the debt.
When it comes to a personal loan you’re not going to have anything at risk. A secured loan can give you a lower interest rate, but you won’t pay too much on the loan anyway. And you’re definitely paying less than you would be across several cards.
If you don’t have great credit, however, you could struggle to get an unsecured loan.
After all, the reason you’re going for the loan in the first place is because you’re having financial problems. You’ll also find that interest rates are higher here. That means you may not see much improvement over your current situation.
3. Home Equity Loan
What this means is you’re using your house as collateral for your loan. Keep in mind that this is going to be very risky. You want to make sure you know all of the details when it comes to something like this, since the risk is so large.
If you have good credit this might be a good option. If you have a good amount of equity built up in your house it might be good as well. You just really want to make sure you have a low level of interest. You’ll be able to put money into your house to get even more of that equity as well.
Of course, there’s always a catch.
With this type of loan, your house is on the chopping block. That means, if you can’t pay your financial institution can foreclose. Anyone who has ever seen foreclosure signs before knows how devastating they can be. Low-interest rates can seem like a great idea, but the risk may not always be worth it.
You’ll be taking a risk here. If you’re not completely sure you can make the payments you could be in big trouble. You could end up being foreclosed on and in court.
All of that can destroy your life the way you know it. Make sure you evaluate the risks carefully.
4. Using Your Retirement Plan
This type of loan also should be carefully considered. When you get to retirement you want that money to be there. That means you should evaluate the options and the consequences if you withdraw from this account. You’ll have a smaller retirement account. You’ll also have an income tax and early withdrawal penalties on the money. Plus you have to pay it back within just 5 years or face even more penalties.
Don’t put this one at the top of your list. In fact, keep it down at the bottom.
5. Borrowing From Life Insurance
While both term life insurance and universal life insurance each offer cash value. You’ll have the opportunity to borrow money from them after you’ve made some payments. What’s great is this type of loan is really easy to get. You’re getting cash value from the insurance policy and it’s being used as a type of collateral. Money gets taken from that cash value or from the benefits that are paid out on your death.
Make sure you consider whether this really makes sense with what you’re going through.
The biggest problem that most people have here is what happens if you don’t pay. If you don’t pay the money back and you don’t add in the interest you’re going to have compounded interest. You’re going to have a balance that adds up. And that balance may ultimately be higher than the cash value you have. You’ll need to keep a close eye on what’s owed and what’s in the policy so you don’t get canceled. You also want to make sure you pay it back so the death benefits you wanted are going to be there.
Credit Card Debt Consolidation – Should I Consider It?
If you’re going to save some money or get your debt paid off quicker it makes sense to consolidate your debt. On the other hand, there are things you need to think about.
When it comes to your specific situation you want to consider the options. The specific debt that you have, including how much and your interest, is important. It takes a bit of research but you could have the best option for you.
Talk with a debt settlement lawyer to find out more about the options. You can talk about your options for consolidation versus settlement, including debt settlement on your own. But make sure you’re staying away from the debt settlement companies.