Debt consolidation could be a good option if you have unmanageable debt and high interest rates — or just want to optimize your debt repayment.
Though applying for a new loan or line of credit may seem counterintuitive, it could help you handle your outstanding balances.
Through a debt consolidation loan, home equity loan or balance transfer, you can combine your debt accounts into a single, fixed monthly payment — ideally with a lower interest rate. Alternatively, you could opt for a lower monthly payment (at the cost of accruing interest) if that fits your budget better.
If budgeting and increasing your income aren’t enough, consolidating your debt into one new account could help. There are various ways to consolidate your debt, and it’s important to explore these options in detail to find out what’s best for your situation.
Debt consolidation loan: Personal loans for consolidating debt are available from online lenders, banks and credit unions. Even if you have fair credit (or a credit score between 640 and 699), you might qualify for a debt consolidation loan with a lower interest rate than the rates of your current debt accounts. Basically, you’d use the funds from the new personal loan to pay off your current creditors — in some cases, personal loan companies may offer to pay off your outstanding balances directly. Then you’d begin making payments on the new loan according to the APR and repayment term.
Tap your home’s equity: If you’re a homeowner, you might consider a home equity loan or home equity line of credit (HELOC). Both allow you to borrow from the equity you’ve built up in your home. A home equity loan allows you to take out a fixed amount of funds, and a HELOC allows you to "draw" on the funds as needed. Many lenders allow you to borrow against your home as long as you’d retain 20% equity in the property (assuming you meet other eligibility criteria, too). Also, keep in mind that if you fall behind on payments, you could lose your home.
Balance transfer credit card: While it may seem like a bad idea to get a new credit card, a balance transfer card offering a 0% introductory APR could be a useful solution. With this strategy, you would pay off your outstanding balances with the new card, effectively transferring the balances to an account with a low or no APR. It’s really only advisable, though, if you anticipate being able to pay off the transferred amount before the introductory APR expires. Otherwise, the card’s typical, double-digit APR would take effect, and you’d be back where you started.
When evaluating these options, consult a monthly payment calculator, such as a personal loan repayment tool, to see what your real-life payments would be. Then you can assess affordability before proceeding.
4 REASONS TO TAKE OUT A PERSONAL LOAN FOR DEBT CONSOLIDATION
Money-related moves can seem overwhelming at first, but weighing your options and considering your personal situation is key to making the right decision. To help, review the pros and cons of debt consolidation.
Additionally, below are scenarios when debt consolidation might — or might not — be an effective solution.
If you’ve determined that debt consolidation isn’t the right answer for you, there are alternatives that can improve your financial situation.
