What Is Debt Consolidation?
Simply put, debt consolidation is combining all of your debt into one loan. Ideally, this loan will have considerably less interest than the average interest you are paying on your smaller accounts.
The idea behind debt consolidation is that you reduce your interest which will allow you to pay off your debt much faster. An added benefit is that having just one account will make your debt easier to manage.
How Do You Consolidate Debt?
There are a number of ways to achieve debt consolidation. Here are the most popular options.
Taking A Home Equity Loan
If you have equity in your home, a home equity loan will typically be the best option. A Home Equity Loan would be a secured loan which is less risky for a lender. This means that your interest rate would be lower than an unsecured personal loan.
A Home Equity Loan allows you to tap into the wealth that you have built through home ownership, although you can not take out all of your equity in most cases. Generally, you are limited to 80 percent of your home equity. That means that if you have 50,000 dollars in equity, you could take out a loan for 40,000 dollars.
Your loan will have a fixed payment and a fixed term that will allow you to budget your debt payoff easily.
Transfer To A Zero Interest Card
It is hard to beat paying no interest, but you will have to have good to excellent credit in order to use this method.
In their hopes to lure you into accepting new credit, many issuers will offer introductory zero percent interest rates. You can take advantage of this by applying for and then transferring your balances over to one of these cards. You can then pay off your debt at an accelerated rate without the burden of interest.
The catch is that you have to have good credit to qualify and the terms will be limited, usually for a year. Depending on the amount of debt you carry, that means you might have to transfer to a different zero interest card when the introductory period ends.
Still, it is hard to beat no interest.
Get A Personal Loan
An unsecured personal loan is another way to pay off that expensive credit card debt. Although the interest will be higher than that of a home equity loan, it is certainly possible to get a lower rate than what you are currently paying.
The thing to keep in mind with a personal loan is that there may be fees, especially if you have less than perfect credit. Make sure that the cost of the loan, with these fees is worth the interest savings you get from consolidating your debt.
Pros Of Debt Consolidation
If you are on the fence about whether or not to consolidate, here are some of the positives that you should consider.
It Reduces Your Interest Rate
This is the reason that most people will choose to consolidate debt, to reduce the interest rate that they pay. Consolidation should allow you to reduce the interest you pay by about two thirds, depending on your credit score.
It Will Raise Your Credit Score
Speaking of your credit score, believe it or not, consolidating will likely improve your credit. If you are taking out a loan, it will add to your credit diversity. In addition, paying off those cards will lower your credit utilization, which could be a huge boost to your score.
It Will Ease Stress
Having multiple high interest credit cards can be stressful. Consolidating your debt can ease that stress because it combines all of this debt into one manageable account. In addition, your consolidation loan will have a term, so you will know when your debt is going to be paid off.
Cons Of Debt Consolidation
While debt consolidation is a good thing, it might not be a good fit for everyone. Here are some cons that come along with it.
You Might Not Save
If your credit cards are maxed, you might be suffering from a low credit score. With a low score, you might not be able to qualify for a debt consolidation with a good interest rate.
You Might Charge Your Cards Up Again
What are you going to do after you consolidate your credit card debt? You need to keep your cards open in order to protect your credit rating, so you will have temptation. Are you disciplined enough to not charge your cards up again? If not, you need to work on your budget and your spending habits before looking into consolidation.