Monthly bills can be like roaches. You turn on the light every 30 days and they scatter as you try to stomp them.
Wouldn’t it be easier if you just had one roach to chase down?
Millions of consumers have said yes by consolidating debt into one payment. Simply put, they get enough money to pay off those scattering bills all at once. That leaves them with a single monthly payment – the one that pays off the large sum they acquired.
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.
Consider the pros and cons of borrowing from family and friends:
You get one from a bank or credit union or website.
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. It’s a methodical and effective way to get out of debt, since you can’t just make minimum payments that don’t put a dent in the total amount owed. 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.
You transfer your balance from all your credit cards onto one card that has a lower interest rate.
It’s much easier to get a low-interest credit card than a personal loan. If you have a good credit score, credit card companies will inundate you with offers.
A 0% interest rate beats the heck out of the 14%-30% most credit cards charge, and it could save you quite a bit of money.
That low rate is always “introductory,’’ meaning it’s a time bomb that will usually go off in 12-18 months. At that point, the interest rate will jump back to the kind of number you ran from in the first place.
There are usually transfer fees when you put your old debt on a new card, so you must read the fine print and figure out how much you’re actually saving.
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. You’re just moving it around, not eliminating it.
You use loan money from your 401(k) to yourself to pay off credit card debt.
It’s relatively easy to qualify to take out a 401(k) loan since there is no credit check. You’re borrowing from yourself, taking money you’ve put away for retirement.
If you don’t return money from your nest egg, your golden years may consist of bagging groceries eight hours a day.
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. Defaulting on a 401(k) loan will also trigger taxes and penalties, since it would be considered income.
Some people consolidate debt by taking out a home equity loan. In this case, you borrow against your home to pay off your credit cards and then make one, lower monthly payment toward your home equity loan.
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. You can wipe all credit card debt off your credit score.
You’re putting your house at risk. If you default on this one, you could lose the roof over your head.
A credit counseling service works with creditors to get better terms, including lower interest rates. You make one monthly payment to the company, which distributes those funds to your creditors.
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. The counselor is trained to help educate you about better ways to manage your money and they’ll get debt collectors off your back.
There aren’t any minimum monthly payments. Each one makes a dent in your debt, which is typically paid off in three to five years.
The counselor will study your financial situation and come up with a budget, and you can’t get any new credit cards while on the program. In many cases, this is actually a pro.
There is a fee for the program, so you must do the math and make sure it’s worth it. 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. For that, to verify that the service is accredited by the National Foundation for Credit Counseling.
Those are your primary debt consolidation options. One is not necessarily better than others.
The most important thing is having the means and desire to make the payments. If you do, you’ll learn the joy of stomping all those scattering roaches for good.
(Roll, S. and Moulton, S.)(2016, April 12). The NFCC’s Sharpen Your Financial Focus Initiative Impact Evaluation. Retrieved from https://www.incharge.org/wp-content/uploads/2015/06/NFCC-OSU-Credit-Counseling-Statistics-Final-Report-2016.pdf
(Jacobs, Deborah)(2013, Mar. 25). Think Twice Before Lending Money To Family. Retrieved from http://www.forbes.com/sites/deborahljacobs/2013/03/25/think-twice-before-lending-money-to-family/#4addb6e27256