Best Way To Consolidate Debt
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?
The Best Way to Consolidate Debt: 3 Steps to Get Started
Before evaluating the best way to consolidate debt, do these 3 things:
- Know how much you owe. Pull a copy of your credit report and add up your total debt.
- Review your assets including your home, vehicles and other valuables. What do you have and what can you liquidate to pay off your debt.
- Review your credit score. How high or low is it and how impactful would it be if it fell.
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.
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. It’s important to understand the pros and cons of each option. The best programs will provide the following:
- Free consultation
- Low to no fees
- Minimal impact on your credit score
- Easy program enrollment
- Financial peace of mind
- A road to paying off all of your debt in three to five years
Now, let’s consider the best ways to consolidate debt.
Consider the pros and cons of borrowing from family and friends:
Pros: Borrowing from Family and Friends
- Easy: It’s often the easiest way to get money, since you don’t have go to a lender and fill out a lot of forms or be screened. 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: Saving money is a key factor in debt consolidation. Your family and friends are most likely to loan you money with low to no interest.
- Flexible: A friend or family member might not even charge interest, and the payment schedule will be flexible. They won’t check your credit score, and that score will improve because credit bureaus will show you wiped out all those bills without acquiring any new debt.
Cons: Borrowing from Family and Friends
- 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.
Debt Consolidation With A Personal Loan
You get one from a bank or credit union or website.
Pros: Personal Loan Debt Consolidation
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.
Cons: Personal Loan Debt Consolidation
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.
Credit Card Consolidation: Balance Transfer
You transfer your balance from all your credit cards onto one card that has a lower interest rate.
Pros: Debt Consolidation via Balance Transfer
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.
Cons: Debt Consolidation via Balance Transfer
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.
Taking Out A 401(k) Loan
You use loan money from your 401(k) to yourself to pay off credit card debt.
Pros: Taking Out A 401(k) Loan
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.
Cons: Taking Out A 401(k) Loan
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.
Taking Out A Home Equity Loan
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.
Pros: 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.
Cons: Home Equity Loan
You’re putting your house at risk. If you default on this one, you could lose the roof over your head.
Credit Counseling & A Debt Management Plan
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.
Pros: Credit Counseling
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.
Cons: Credit Counseling
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