You Could Use Debt Consolidation to Pay Off Your Debts
It’s common for people to rack up debt. Due to interest rates, your balance grows over time and you’re required to pay a higher amount than what you originally borrowed. Debt consolidation can be a solution to this problem.
What Is Debt Consolidation?
When you consolidate debt, you take out a loan or line of credit to pay off your previous debt associated with different accounts. Once the original debt is paid, the debt consolidation loan functions like any other installment loan—you make monthly payments to repay it.
A debt consolidation loan makes it simpler to clear your debt as you only make one payment instead of several, making your debt more manageable. However, debt consolidation only makes sense if the interest rate you get is lower than what you were paying on your previous loans.
For instance, if you have a credit card debt of $10,000 at an interest rate of 16% and you consolidate it at an interest rate of 8%, you would repay only $2,166 as interest instead of the $6,594 you had to pay originally. Additionally, the repayment period would reduce from 83 months to 60 months, while there will only be a $3 difference in monthly payment (it would go from $200 to $203), which is quite affordable.
How You Can Consolidate Debt
There are many options available to consolidate debt. The most common ones are:
Personal Loans: You could consolidate debt by taking out a personal loan. However, you may or may not get a good interest rate on the personal loan. The interest rate depends on your income, credit health, and other factors. If your credit is not good, you may not get a low-interest loan.
Home Equity Loans and Lines of Credit: If you’re the owner of a home, you could consolidate debt by borrowing against your equity at a lower interest rate. The amount you can borrow depends on the equity you hold (the value of your property minus the outstanding balance on your home loan), and other factors. The available value is typically enough to pay off your debt.
As your debt is secured by your home, it’s risky because if you default on your payments, your home can be foreclosed.
Credit card balance transfers and 401(k) loans are some other ways of consolidating debt.
