Consolidating your debt into one single loan is a great idea if you have multiple accounts open. Especially if some or all of them have high interest rates that can be hard to get out from under. Consolidating your debt basically means refinancing it and putting it all into one single loan that you then pay monthly. This method of debt management is simple to navigate on your own, so if it is your first time you don’t need to stress. Here are a few options for you to consider utilizing once you’ve decided you are serious about consolidating your loans and regaining your financial confidence.
Consolidation and personal loans
Even though these two loans sound different they are one in the same. Debt consolidation is just one of the many uses for a personal loan. There is no special form you fill out or any extra steps needed to take in order to make your personal loan a tool to reorganize your debts. A personal loan is a form of installment credit, which falls into the unsecured credit category, and you can use it for anything you would like to. This means that you can use a personal loan to pay medical bills, credit card debts, or cover the cost of home improvement projects or car repairs. A mortgage or car loan themselves are a form of secured credit, meaning that they are considered an asset that can be taken away if you default on paying. When it comes to using your personal loan to consolidate debt you have to make sure you only include items that are forms of unsecured debt. This means you can include credit cards, payday loans, and medical expenses. By doing this, you will be able to relocate the debts you have that are charging you high interest rates into one place. This will give you just one fixed interest rate, allowing you to save some money. The typical amount given for a personal loan can be anywhere from $1,000 to $100,000 but it will depend on your credit score and how much the lender is willing to let you borrow.
Credit card balance transfers
You will need to have a decent credit score to qualify for this option. This is great if you have multiple credit cards from various card issuers. This form of debt consolidation is very similar to a consolidation loan but in the form of a credit card. They normally have an introductory offer of 0% interest but they end after about eighteen months, giving you less time to pay it off without having to pay interest. Whether or not you think you will be able to pay off your debt within the introductory offers time frame, it is always a smart idea to check and see what the interest rate will be once it’s over. They can be anywhere from three and five percent which can greatly hinder your plan to repay if you are unaware or unprepared.
Home equity loan
You can borrow against the equity you have in your home with a home equity loan or refinancing. This will give you a higher borrowing limit and usually a lower interest rate because your home is used as collateral. This method involves more risk for that same reason, if you default on your payments you could potentially have to foreclose on your home. Another risk involved is that if the housing market takes a dip, causing the value of your home to drop, you can then be upside down in your loan. If this happens you will then owe more money than your home is worth, adding to your debt problems.
Whole life insurance
This is a type of permeant life insurance that offers cash value. It works similarly to term life insurance except it accrues cash benefits over the long term with compounding growth each year. You can take out a loan against the cash value in your policy, which typically have lower interest rates and payments are not required regularly. Any debt you have upon your time of death will be paid by the insurance policy, deducting it from your beneficiary. Another option with whole life insurance is you can cash out your policy, therefore terminating it in exchange for the cash. Keep in mind that by doing this you will more than likely owe taxes on the money and you will lose the death benefit for your beneficiaries.
Once you have made the decision to consolidate your debt, you have quite a few options to choose from. Make sure you are cautious when selecting which method to use. It is also extremely helpful to make a budgeting plan and stick to it, especially while you are paying on your consolidation loan. Whichever route you take will be sure to help you improve your credit score and help become that much closer to financial freedom.