When you have several credit card bills to pay off, it can be both challenging and tedious. A debt-free life seems like an impossible dream for anyone with multiple unpaid bills lying on the table. We often resort to payday loans, small personal loans, auto loans and numerous credit cards to pay for our monthly expenses. However, when the time comes to pay each one of them off, we find ourselves in a big mess.
Consolidation of existing debts is a debt refinancing method that allows people to coalesce all existing debts into one. It reduces the number of payments to just one per month. In most cases, the new single payment is much lower than the current amount a person is paying to his or her creditors.
It is not compulsory to take out a new loan for paying off the consolidated debt. Working with non-profit debt counseling can help you repay your debt without opening a new line of credit. Nonetheless, people often require a new loan to pay off their existing mortgages. This debt consolidation loan typically has a lower interest rate than their credit cards and other revolving lines of credit.
Can you consolidate debts on your own?
That is the traditional way people choose to pay off multiple outstanding debts. Consumers prefer working with a debt consolidation company since they get expert guidance and the chance to renegotiate their credit card interests. If you don’t want to work with a debt consolidation company, there are a few ways you can consolidate your debts and pay them off on your own.
Credit card balance transfer
Most credit cards charge a fee for a balance transfer. The average fee for transfer is around 3% of the balance. If you can find a card with a 0% transfer fee and a comparatively low-interest rate, you should think about transferring your outstanding balance. However, that only makes sense if your new card can accommodate the entirety of your existing balance from one or more credit cards.
When you transfer your existing balance from one or multiple revolving lines of credit to a 0% fee, low-interest credit card, you can be sure that you are making a majority of the payments towards the principal and not the interest. Always remember to make the most of the introductory period, since most credit card companies charge a nominal interest on the balance during these initial six to twelve months.
For example – a person owes $5,000 to a credit card company with a 15% interest rate. If the person pays $400 per month, it will take him or her around 15 months to pay off the entire balance on that card. Now, the consumer transfers the whole balance to a 0% interest credit card with a 3% transfer fee. When he or she makes a payment of $400 per month, the person will require only 13 months to pay off the entire balance including the $150 transfer fee, yet he or she will save $600 in the process.
If you want to improve your FICO score, then credit card balance transfer might not be a great idea. It might take around fourteen days to complete the balance transfer. During this period, the applicant still has to pay the creditors. A lapse in payment deadline can worsen an already poor credit score. It is imperative to go through a credit card company’s terms of service before you can apply for the balance transfer.
Go for a debt consolidation loan
It is the most traditional form of debt consolidation among American citizens. It is a new unsecured loan that can pay off all outstanding lines of credit, and the borrower has to make only one fixed payment per month to the new lender.
Banks, non-profit organizations, credit unions, and even online lenders offer consolidation loans for debt management at varying rates. The interest rate typically depends upon the FICO score of the individual. While the interest rates most banks and credit unions offer is quite low, people seeking debt consolidation don’t have the FICO score necessary to qualify for them.
Going for a debt consolidation loan is beneficial only if you have a new monthly budget. Unless you plan to refrain from poor spending habits, a new loan cannot help you strengthen your finances. Always check whether the new payment terms are amicable for you. Only get a new credit if it significantly lowers your monthly expense and enables you to make the payments on time. For more information, visit Nationaldebtrelief.com.
Opting for a home equity line of credit (HELOC) or home equity loan
The average American adult already has an existing mortgage on his or her home. As a result, the available equity on a home is the difference between the fair market value of the house and the amount he or she already owes. A person can borrow a lump sum against the available equity of his or her home. It is a home equity loan, and a person can use the money to pay off multiple existing credit card bills and other outstanding debts.
Alternatively, a person can apply for a home equity line of credit (HELOC) against the available equity of his or her home. It is similar to a credit card or any revolving line of credit. A person can utilize a HELOC as and when necessary to borrow money for paying off other lines of credit. Unlike a home equity loan, a HELOC does not offer a lump sum amount at one go, and the borrower can pay the exact amount he or she borrowed (with interest) per month.
However, it makes little sense to put your house on the line to pay off credit card debts, unless it is quite significant. Multiple Unsecured loans can be quite the bother, but taking out a new line of credit by using your home as collateral is a risky move. It implies that upon non-payment of the loan amount, your new creditor can foreclose on your home. You should only take out a home equity loan or HELOC when you are in dire need for money at low interest.
Borrow from your life insurance
Borrowing from any insurance policy is not a desirable way to access cash. However, when you have to choose between declaring bankruptcy and borrowing from life insurance, the latter seems like the smart thing to do. However, you must remember that you can only borrow against a whole life insurance policy. Term life insurance policies don’t allow people to borrow.
One of the advantages of borrowing from your life insurance is that they don’t affect your FICO scores. Therefore, when you borrow from your insurance policy, you don’t have to provide an explanation on how to use the money or pay taxes upon receiving the loan amount. Moreover, there is no mandatory monthly payment. However, the most significant disadvantage of borrowing from your life insurance is the interest rate. The interest rates can be notoriously high. Not paying the amount back on time results in accumulating interest rates on balance. Accruing interest can increase the risk of your loan exceeding the cash value of the policy. It can cause the policy to lapse.
As long as you have the option to preserve the permanent insurance guarantee and not reduce the death benefit, you should think about borrowing from your life insurance to pay off your existing debts. You should always speak with your policy adviser before you take such a step. Talking with a registered debt counselor can also help you find alternatives to taking out a new loan against your insurance policy.
Borrow from your retirement plant
Before you go ahead and borrow from your retirement plan, you should consider other options like balance transfer credit cards, new personal loans, and secured loans. In case you believe that this is the option for you, you should have a financial planner take a look at your accounts before you finalize the deal. Taking any amount of loan against your retirement account implies that you have decreased your earnings up until you pay the amount back.
A person cannot take out a loan from his or her IRA, as that would be a prohibited transaction. There are one a few exceptions when people can qualify for short-term loans, but it is more of distribution and rollover than a loan.
While borrowing might be necessary for you to save your assets, FICO scores, and financial status, you should only think about borrowing from your retirement when bankruptcy is the only other option.
All five options are not ideal for everyone. Since each person is in need of debt consolidation due to different reasons, the perfect solution for their problems will also be different. Consulting a financial advisor or a debt consolidation agency can help you find out about the various methods of debt refinancing. Always remember that when you are taking out a debt consolidation loan, you are not paying off all your outstanding debts; you are technically moving the debts around so that they become easy to manage.