Have you found yourself overwhelmed with managing your bills? Perhaps you have a few lines of credit, coupled with your typical living expenses, subscriptions, utility payments, vehicle payments, insurance, groceries, student loans- and it’s all weighing heavily on you and your ability to keep your payments on time. Or maybe you have a few lines of credit with high interest rates and you feel you aren’t able to pay them down in a reasonable amount of time because the interest keeps chipping away at your wallet.
Debt consolidation comes in multiple forms, which we will discuss. It can be an efficient way to pay down your debt and save you a little money along the way. As you can tell from the name, debt consolidation is simply that. You take one line of credit, usually in the form of a new loan or balance transfer to a credit card with lower rates, and you use that to pay off your multiple accounts. Then, ideally, you would find relief in budgeting for only one payment while not accruing the same amount of interest as before.
Checklist before Consolidating
Debt consolidation, while a little more convenient, may not always be the answer. Here are some things to consider as you prepare to simplify your finances:
- How are you with your budget? Do you have the discipline of keeping a monthly budget, on-time payments, and good credit?
- Does your total debt that you are trying to consolidate amount to less than 50% of your total income?
- Have you entered your debts into a debt consolidation calculator to see if you benefit from this method?
Types of Debt Consolidation
Secured Loans– If you have assets, like a car that has been paid for, you could potentially qualify for a lower interest secured loan by borrowing against it. This method could be beneficial when wanting a great interest rate, but comes with the risk of repossession.
Unsecured Loans– If you’re not looking to risk your assets, you have the option to take out an unsecured loan to accomplish your debt consolidation. They do come in two forms:
- Fixed Interest Rate– These are loans that have a standard interest rate that is guaranteed to remain the same throughout the term of the loan. It’s awesome for a budget and knowing that your payments will be consistent, however, you may want to look for early repayment fees. These loans aren’t necessarily as flexible when it comes to paying them off early, and you may find extra costs if you choose to do so.
- Variable Interest Rate- These have the flexibility you desire, and are typically low interest, too. While you may not have any early payoff penalties, you will have to pay attention to the interest rates and their likelihood of changing with the market.
Balance Transfer– Since debt consolidation is ideal for the person who keeps a monthly budget, pays their bills on time and has credit in good standing, it’s likely an option to find a good interest rate for a credit card and perform a balance transfer. Some credit card offers will provide a balance transfer at 0% APR for 6-12 months, and then interest kicks in from there.
If your debt can be paid off in that time frame, it may be beneficial to use this method. Keep in mind, you’d need to be certain of the time your interest rate increases and diligently pay down that debt as quickly as possible.