Which raises a couple of questions: How do I get that large lump sum that will allow me to consolidate my debt, and which is the best?
Here are your primary options for debt consolidation programs , each with its pros and cons. What is the Best Way to Consolidate Debt? There are many ways to get out of debt. What you choose will depend on your financial situation. The best programs will provide the following: Whether or not this is a possibility for you depends on several factors, namely — are you close with someone who has the financial capability to loan you money and be flexible with the repayment amount and term?
Do you feel comfortable asking your family or friends for money? If you are considering asking a friend or family member for help with money, you should be willing to sit down with them, share your budget, debts, monthly payments and interest rates with them. Consider the pros and cons of borrowing from family and friends. If your friend or family member charges you interest, chances are it will be lower than whatever you can get from an established lending institution. Low to no Interest: Your family and friends are most likely to loan you money with low to no interest.
A friend or family member might not even charge interest, and the payment schedule will be flexible. Most loans include origination fees and other costs. Depending on the size of the loan, this could be a large savings. If you have trouble paying the loan, it could destroy a cherished relationship, damage the high opinion family and friends have of you, trigger a terminal case of the guilts and make for some very strained Thanksgiving dinners. Another con is privacy. You may not want those close to you to know about your financial problems.
You should consider this option when you have a good relationship with someone who wants to help you and forgive the occasional late or missed payment, due to unforeseen events.
Debt Consolidation With A Personal Loan A personal loan is a loan issued by a bank or credit union, whereby you borrow a specific sum of money and pay it back in installments over a well-defined repayment term, such as 12 months, 24 months, 36 months or 6o months. Personal loans typically have fixed interest rates that vary depending on your credit score and the size of the loan.
A personal loan is a form of unsecured debt, meaning the loan is not backed by any collateral. When you consolidate debt with a personal loan, you borrow money from a bank or credit union, use that money to pay off a number of smaller debts credit cards, utilities, cell phone, etc and then one consistent monthly payment to the bank or credit union.
There are a lot of potential lenders, so you can shop around and see which offers the best terms. Stability comes with having one monthly payment due on a specific date. Most personal loans are made for three to five years. Unlike loans from family or friends, lending institutions thoroughly vet an applicant. The worse your credit score, the higher your interest rate will be.
You might not even qualify for a loan if you have a poor credit score. When a Personal Loan is a Good Idea? A personal loan is a good idea when the interest rate is lower than the average interest rate of your debts and the monthly payment is affordable. If the payment with a personal loan is higher than you can afford, ask for a longer repayment period to bring it down. Balance Transfer Using credit card balance transfers to consolidate your credit card debt is another way to save money on credit card interest and make progress toward paying down your debt.
Take higher interest credit card debt and transfer the balance to a credit card that has a lower interest rate. Before transferring, give your current creditors a chance to lower or match competing offers. If you have a good credit score, credit card companies will inundate you with offers.
At that point, the interest rate will jump back to the kind of number you ran from in the first place. Credit card debt is a major factor in figuring a credit score. Unlike a personal loan, credit card consolidation does not wipe that particular debt off your ledger.
When is a Balance Transfer a Good Idea? Transferring high-interest credit card debt to lower-interest cards is a good idea when you can save a substantial amount of money on interest, especially if you qualify for low to no interest introductory offer cards. Taking Out A k Loan If you have a k plan at work, you can borrow a portion of it and use the money to pay off other debts.
Loans against your retirement plan often must comply with company rules, such as you can only borrow fifty percent of what you have vested, and you have to repay it through a payroll deduction, within 5 years.
You may be required to pay back the borrowed sum with interest around 5 percent. If you are interested in taking out a k loan, talk to your benefits administrator and compare payment terms with other consolidation options. Pension plans are attractive because they put your money in an investment portfolio.
When you take money out, it is no longer making you money. When Borrowing from a k is a Good Idea Borrowing from a k is a good idea when you are young and still have decades to put away money for retirement.
You can take out a home equity loan from a bank, credit union, mortgage broker or online lender like SOFI. The terms of the loan will depend on your credit score, how much equity you have in your home and your debt-to-income ratio. Some home equity loans have fixed interest rates and fixed monthly payments. Others are variable rate with a fixed period of time where you can make lower, interest-only payments typically 10 years. Low and stable interest rates, and the interest you pay is typically tax deductible.
There is a set payment schedule that does not allow those token minimum payments. If you default on this one, you could lose the roof over your head. You should be very careful not to get into a cycle of borrowing against your home every 5 years. Remember, you want to be in a position that by your 60s and certainly by your 70s, your home is paid off.
You make one monthly payment to the company, which distributes those funds to your creditors. Consolidating your debt payments with a debt management plan requires you to cease using your credit cards, live on a budget and pay off your debt in years.
Before you can enroll in a debt management program, you must qualify based on your income. If you make too much money, you may not be approved. Conversely, if you make too little money, bankruptcy may be recommended to you by a credit counselor. If you do qualify based on your debt balances and income, your creditors still must accept proposals issued by the credit counseling agency. There are plenty of nonprofit debt management companies eager to help consumers.
The basic requirement is you must have enough income to cover your bills. All sorts of debt can be addressed, from credit card to medical to unsecured bank loans to rent.
Each one makes a dent in your debt, which is typically paid off in three to five years. In many cases, this is actually a pro. A comprehensive study by Ohio State University found that consumers in a credit-counseling program significantly reduced their debt and developed better money management skills than consumers who did not receive counseling.
The key is finding a good credit counseling service. When Credit Counseling is a Good Option Credit counseling is a good option when you are ready to stop using your credit cards, get serious about your budget, reap the benefits of reduced interest rates and get out of debt in years.
Credit counseling is a good option when you want to consolidate your debt without taking out another loan and without major impact to your credit score. For more information on credit counseling and to learn how others have paid off their debt, visit InCharge Reviews. Borrowing from a Life Insurance Policy A lesser known option for consolidating your debt is to borrow money from a life insurance policy.
You can borrow up to the cash value of the policy, use the money to pay off several smaller debts, and then make payments to your life insurance policy. You may not need to repay the borrowed sum, but understand that your death benefit will be reduced by however much you borrowed. If paying your debt off is more important to you and offers you more peace of mind than having a robust death benefit, then borrowing from your life insurance policy may be a good idea. Life insurance is designed to give you peace of mind and help your family manage the loss of you, your spouse or another family member.
Consider the other options available to you on this page before going down this road. When Borrowing from a Life Insurance Policy is a Good Idea Borrowing from a life insurance policy could be a good idea if the policy has significant cash value, and if you or your family would not be financially devastated by the loss of the insured, with a reduced or no pay-out. This option may be preferable to bankruptcy, if none of the other options detailed are feasible. Payday loans have no advantages over other, lower interest, longer repayment term loans available.
Payday loans are expensive and risky and will put you in a worse financial situation than simply defaulting on your credit card and other debt.