Eight Ways To Consolidate Debt

Eight Ways to Consolidate Debt

 by: Gerri

Detweiler

Next to winning the lottery, a debt consolidation loan is a debtor's

dream. With one monthly payment and a fixed monthly payment schedule, you can

actually see an end to those monthly payments.

In reality, consolidating bills isn't always easy. If you have a lot of

debt, it can be hard to find a consolidation loan at a lower interest rate. And

if you're not careful, you can end up deeper in debt than when you started.

Your goal in consolidating your debt should be to lower your overall

costs. To accomplish this there are two things to keep in mind:

1. Get the lowest interest rate possible
   
   

2. Have a plan to pay off your debts in 3 – 5 years.
   
   

Here are some of the best ways to consolidate:

Using Credit Cards

The good news about this method is that with a good credit rating, you may

get a much lower rate than other forms of consolidation loans. And since credit

card issuers don't require collateral, you aren't "risking the farm."

Call your current issuer to ask what interest rates they will offer you if

you transfer balances from other cards over to theirs. Go for a fixed rate if

you can get it, and ask them to waive any transfer fees. If you can't negotiate

a low rate with your current issuer, try shopping for a new card at a site such

as http://CardRatings.com" target=new>CardRatings.com. But be

careful! Too many applications for credit in a short period of time can hurt

your credit rating.

Once you do consolidate this way, be sure to set up an optimal payment

plan so you can be debt-free in 3 – 5 years.

Home Equity Loans

With a home equity loan, you borrow against the value of you home, minus

any other mortgages. The two major kinds are: 1. A Home Equity Loan – a fixed

amount of money for a fixed period of time (sometimes at a fixed rate) and 2. A

"Home Equity Line of Credit" where you borrow up to a pre-approved credit limit

(interest rates usually variable) and can borrow again if you still have money

available.

These loans can offer attractive rates, low payments, and the interest is

usually tax-deductible if you itemize. Many issuers offer no or low closing

costs for these loans. Interest rates are often variable, however, and there's

always the risk that you can lose your home if you can't pay.

Cash Out Refinance

Refinancing your home and taking out money to pay off bills (called "cash-

out refinance") is yet another way to tap the equity in your home. If you can

refinance at a substantially lower interest rate, you'll eliminate the high

interest costs of the debts you pay off, and you could even come out with a

lower payment than you have right now since rates are so low.

One option to consider: an interest-only loan. By lowering your monthly

payment, you can free up money to use toward paying down other high-rate debt or

building a retirement fund.

Make sure you understand the total cost of refinancing. Take any money

you've freed up by paying off other bills and use that to create an emergency

savings fund.

Traditional Debt Consolidation Loans

A debt consolidation loan is an unsecured personal loan, and the only

collateral you are offering for the lender's security is you. Because lenders

consider them risky loans, they're usually more expensive and not always easy to

get if you have a lot of debt.

If the interest rate is too high to make it worth it and the repayment

term is ten or fifteen years, you should probably consider another method of

consolidation. However, if the term and interest rate are right, this can be a

great way to actually save money in the end. (Check
href="http://Bankrate.com" target=new>Bankrate.com for current averages).

Remember, to calculate the total cost of the loan from start to pay-off.

Credit Counseling

Credit counseling agencies may help you get out of debt, though they don't

actually consolidate your debt. Instead, payment plans (usually with lower

interest and fees) will be worked out for all of your eligible debts. You'll

make one monthly payment to the counseling agency, which will pay all your

creditors.

Participating in a credit counseling program generally won't hurt your

credit rating, and if you stick to the plan you can be out of debt in three to

six years. But be careful which agency you work with. If the counseling agency

pays your bills late, you'll pay the price since you're still responsible to the

lender. It happens.

Debt Settlement

Debt settlement is another option that's become increasingly popular with

consumers who have a lot of debt and can't, or won't, file bankruptcy. You stop

paying your bills and instead make a regular monthly payment to the settlement

company. Your creditors contact them, and not you, about your overdue bills. As

your accounts fall further behind, the negotiation company will settle your

balances – usually for 50% of the balance or less (including fees) depending on

the debt. Most people can be out of debt in less than two years or less using

these programs.

It's not perfect. Your credit rating will be hurt in the short run and you

must be certain you're dealing with a reputable company or the money you pay

each month could disappear. Still, for consumers who can't shoulder the burden

of debt they have now, it can be a very good option.

Retirement Loans

If you have a 401(k), 403(b) plan or certain types of pension plans, you

can borrow against your nest egg. (You can't borrow against your IRA.) It's

easy, with no income qualifications or credit check.

The key here is to borrow against your retirement account, rather than

withdraw from it early so that you don't end up paying taxes and a 10% penalty.

Also, if you leave or lose your job, you may have to pay your loan back

immediately or pay taxes and penalties for an early withdrawal.

These loans typically offer low interest rates, and interest is paid to

you, since you are the lender. While tapping your next egg like this can short-

change your retirement, so can costly debt payments. If you are in your 20's and

30's, you obviously have more time to rebuild a retirement nest egg, but even if

you're in your 40's or 50's, you will want to weigh the cost of paying the high

interest of the debts over time, versus borrowing from your retirement account.

The return you get from paying off high-rate debts is guaranteed – while the

stock market isn't.

Rapid Repayment

There is a mathematically optimal way to pay your debts. Choose a fixed

level monthly payment, and commit to it each month. Pay as much as you can on

the highest rate debt first, while payment the minimums on the rest.

I almost always suggest consumers with debt start by creating one of these

plans. Many people who do so find they don't even need to consolidate to get out

of debt in the next few years. They just need a plan and they can do it on their

own.

Overview

The biggest mistakes people make when it comes to consolidation are:

1. Not having a plan for paying the debt off after they've consolidated,
   
   and
   
   

2. Procrastination. Waiting for the "perfect" solution to come along
   
   almost always means you'll end up deeper in debt. Choose your approach, and
   
   start getting out of debt today!
   
   

For more information on dealing with debt, visit
href="http://www.stopdebtcollectorscold.com"

target=new>www.stopdebtcollectorscold.com.

Copyright 2003 by Gerri Detweiler, all rights reserved.