We’ve all been told to avoid getting into debt, but unfortunately, like many things in life, it can be unavoidable at times. You may have had to take out a student loan, a home loan, a medical loan, or spent money on your credit card when that rainy day arrived sooner than expected. It’s quite common to have a few different debts – each for their own reasons.
Paying off this debt is hard, especially when it’s across several different credit cards and loans. Each loan comes with its own interest rate, terms and payment date. If you’re struggling with paying off various different credit cards and loans, then it may be time to consider debt consolidation.
What is debt consolidation?
Debt consolidation is the process of combining all your debts into a single, lower interest rate loan. You do this by taking out a loan with the intent of paying off other debts and liabilities. Ultimately, consolidating multiple debts into one debt. The terms are much more favorable, usually offering more extended repayment periods as well as lower interest rates.
There are a few options for people who are looking to merge their loans into a single payment. Note that debt consolidation does not instantly remove debt, you will still be required to make monthly payments. Though, it is rather one higher payment compared to several different payments.
LetMeBank offers various options for debt consolidation, suitable for those with both good and bad debt.
Types of debt consolidation
There are a few different debt consolidation options available, some include credit card transfers, home equity, personal loans or a debt consolidation loan. Another option is to borrow money from friends/family and then work out a payment plan.
Your credit score, how quickly you need the money, the type of debt that you have and your financial goals will help determine which option is more viable.
Credit card balance transfers
One of the most popular types of debt to consolidate amongst borrowers is credit card debt. A credit card balance transfer is when you transfer your various credit card balances onto a single card, ideally the one with the lowest interest rate. Many credit card companies offer zero- or low-percent interest on balance transfers in hope to attract new customers. Though, these typically expire after the first six months.
For borrowers going with this option, you need to make sure to check when the low interest rate will expire and what the regular rate will be. You will also need to get approved for a credit card with a large enough balance to transfer all of your credit card debt.
The downside of this option is that frequent transfers between credit cards will negatively affect your credit score. Your credit score will, however, improve as you pay off the balance.
Home equity
A home equity loan can be taken out using your house as collateral. In order to do this you need to have a fair amount of equity in your home as well as good credit. Because this is a secured loan, the interest rates are generally lower compared to other unsecured loans, however your home will then be on the line for your credit card/other debt. This means that you could face foreclosure on your house if you become unable to make the payments. This is the reason why many financial advisors advise against borrowing against your house through a home equity loan.
Other options if you have equity in your home is:
● Home equity line of credit: a line of credit that you can access until you reach your credit limit.
● Refinancing: you can refinance your mortgage into a new loan and use the excess cash to pay off the other debts. This is called a cash-out refinance. It’s your equity to use how you please, so the options are endless.
Personal loan
You can use a personal loan as a means of debt consolidation if you manage to borrow a loan that is large enough to cover your outstanding debt. Personal loans are unsecured loans with fixed payments over a period of time, offered by banks and credit unions.
You will have to apply for your personal loan at your chosen institution. Your credit rating will impact whether you get approved or not. You may still get approved if you have bad debt, however with a higher interest rate. When taking out a personal loan you should always check that you are getting a better deal in terms of interest rates. If the personal loan has a much higher interest rate, then even though you will only have one payment every month you may end up losing money in the long run.
The main benefit of a personal loan is that it is a term loan and you know that the interest is not going to compound.
Debt consolidation loan
Several banks and credit unions offer debt consolidation loans for the specific purpose of combining your debts. These types of loans vary, making it important to consider a few options carefully. While they will generally have lower interest rates than what you are currently paying, this is often achieved by increasing the repayment period. The longer repayment timeline could lead to you paying more interest in the long run – as well as keeping you in the cycle of debt for longer. You also need to check if there are any origination fees that come with the loan, as this will again impact whether you benefit in the long run.
In order to make debt consolidation effective, you need to consider a few different options to ensure that it won’t make you pay more in the end. The type of debt consolidation route that you take will be a personal decision, depending on what you can afford each month as well as your overall debt repayment plan. If however, you feel like you need assistance in the matter there are various debt counseling companies available to help you draw up a debt management plan as well as offer proper advice on the various routes that you can take.