The 4 Best Debt Consolidation Options and When It’s Smart to Pursue This Strategy

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When you’re considering consolidating debt, it means that you’re attempting to lump all of your debts together in order to make one payment to creditors. It’s not for everyone, especially if your debts are deep and severe.

But if handled correctly, it can be a great way to pay off creditors faster and save money. In this artlcle, you’ll learn about the four best debt consolidation options and when it’s wise to pursue this strategy.

Debt Consolidation Options

1. Get a Balance Transfer Credit Card

Under this strategy, you would transfer the balances from high interest rate credit cards to a balance transfer card with a lower rate. Let’s say that you have a retail credit card with a 13% interest rate and a balance of $5,000. In this case, your minimum monthly payments would be $104. But on a balance transfer card with a 3% rate, the payment would fall to $62. That’s a savings of 40%.

Of course, it would take you a decade to pay off $5,000 if you’re making minimum payments, even at the lower rate. So your goal is to pay down as much debt as possible as quickly as you can. And keep in mind that the low interest rate on many balance transfer cards may come with a time limit. In six months or a year, it could rise to a much higher rate.

2. Apply for a Debt Consolidation Loan

You can get an unsecured debt consolidation loan from a bank or credit union. But to qualify or get any sort of favorable interest rate, your credit has to be in decent shape and you probably have to have a good relationship with the bank.

Now, you could go in another direction with this type of loan. For example, you can borrow against the equity in your home. This would be considered as a secured loan. But the downside is that if you fail to make payments, you could lose your house.

3. Borrow Against Your 401k Account

You can use this strategy, but I wouldn’t recommend it. I hate it when people dip into their 401k retirement accounts. But check with your employer on this one if you’re dead set on doing it. Most companies will allow you to borrow against your account, but they don’t have to.

In general, you’re allowed to borrow up to 50% of the cash value in your account. However you have to pay it back with interest within 5 years. If you don’t, the tax man will come after you.

4. Borrow Against Your Whole Life Insurance Policy

We can discuss the merits of buying such a policy to begin with, but that’s another discussion. Just know that most whole life insurance policies allow you to borrow against the cash value of the policy.

The great thing about borrowing against the policy is that you don’t have to go through a credit check or even pay the money back. However, if you don’t pay the money back, it will be taken from the policy’s proceeds when you die.

When Its Smart to Consolidate Debt

– If the interest rate you pay on the consolidated debt will be lower
– For example, let’s say that you have several credit cards and loans, and their interests range from 12% to 20%. If you can get a debt consolidation loan for 9%, you’re clearly going to be much better off, and your monthly payment will be a lot less.

– If your total outgoing payment amount will be reduced – That’s the whole point right? Pull out your calculator and determine exactly how much debt consolidation with save you each month.

– If it means that you’ll pay off your debt faster – Just because you get a debt consolidation loan and feel all good about yourself, it doesn’t mean you should drag your feet when it comes to getting your debt paid off.

– If the interest on the consolidated debt is a fixed rate and not a variable rate – When you get a debt consolidation loan with a variable interest rate, the rate may start low but there is a very high likelihood that it will rise significantly over time. So you might find a variable rate loan that guarantees to start out at 8%, and it might actually be lower than a fixed rate loan at the time. But the rate could quickly zoom to 14% based on any number of reasons that the lender specifies in the contract.

The great thing about having a fixed interest rate on a debt consolidation loan is that you know exactly what your payments will be every month.

– If you place your hand on a stack of bibles and promise not to take on new debt until the old debt is paid off – One of the dangers for many people who consolidate their debt is that they just keep spending and spending. That defeats the whole purpose for implementing a debt consolidation strategy.

In summary, debt consolidation offers a great way to lower your monthly payments to creditors and save money. As shown above, there are several debt consolidation options that can help. But none of them will work if you’re not very disciplined in managing your finances. So when weighing this strategy, approach it with honesty and integrity.