Consolidating your debt - 8 ways to combine all your debt.Next to winning the lottery, a debt consolidation loan is a debtors dream. With one monthly payment and a fixed monthly payment schedule, you can actually see an end to those monthly payments. In reality, consolidating bills isnt always easy. If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate. And if youre not careful, you can end up deeper in debt than when you started.
Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3-5 years.
Home Equity LoansWith a home equity loan, you borrow against the value of you home, minus any other mortgages. The two major kinds are: 1. A Home Equity Loan a fixed amount of money for a fixed period of time (sometimes at a fixed rate) and 2. A “Home Equity Line of Credit” where you borrow up to a pre-approved credit limit (interest rates usually variable) and can borrow again if you still have money available.
These loans can offer attractive rates, low payments, and the interest is usually tax-deductible if you itemize. Many issuers offer no or low closing costs for these loans. Interest rates are often variable, however, and there’s always the risk that you can lose your home if you cant pay.
Cash out refinanceRefinancing your home and taking out money to pay off bills (called cash-out refinance”) is yet another way to tap the equity in your home. If you can refinance at a substantially lower interest rate, youll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low.
One option to consider: an interest-only loan. By lowering your monthly payment, you can free up money to use toward paying down other high-rate debt or building a retirement fund.
Make sure you understand the total cost of refinancing. Take any money youve freed up by paying off other bills and use that to create an emergency savings fund.
Traditional debt consolidation loansA debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lenders security is you. Because lenders consider them risky loans, theyre usually more expensive and not always easy to get if you have a lot of debt.
If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method of consolidation. However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate.com for current averages). Remember, to calculate the total cost of the loan from start to pay-off.
Credit counselingCredit counseling agencies may help you get out of debt, though they don’t actually consolidate your debt. Instead, payment plans (usually with lower interest and fees) will be worked out for all of your eligible debts. Youll make one monthly payment to the counseling agency, which will pay all your creditors.
Participating in a credit counseling program generally wont hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years. But be careful which agency you work with. If the counseling agency pays our bills late, youll pay the price since youre still responsible to the lender. It happens.
Debt SettlementDebt settlement is another option that’s become increasingly popular with consumers who have a lot of debt and cant, or wont, file bankruptcy. You stop paying your bills and instead make a regular monthly payment to the settlement company. Your creditors contact them, and not you, about your overdue bills. As your accounts fall further behind, the negotiation company will settle your balances – usually for 50% of the balance or less (including fees) depending on the debt. Most people can be out of debt in less than two years or less using these programs.
Its not perfect. Your credit rating will be hurt in the short run and you must be certain youre dealing with a reputable company or the money you pay each month could disappear. Still, for consumers who cant shoulder the urden of debt they have now, it can be a very good option. Retirement Loans
If you have a 401(k), 403(b) plan or certain types of pension plans, you can borrow against your nest egg. (You cant borrow against your IRA.) Its easy, with no income qualifications or credit check.
The key here is to borrow against your retirement account, rather than withdraw from it early so that you don’t end up paying taxes and a 10% penalty. Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal.
Check out or Debt Consolidation Calculator
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