You’ve made the pledge. You’re sick of struggling with debt. The stress of dealing with creditors has almost made you physically sick. You’ve learned from first-hand experience that financial problems can cause psychological troubles, strained relationships, and even health problems.
You promised yourself that you’ll do whatever it takes to get rid of your debt. There’s just one problem. You don’t know how to do it. You’ve taken the first step, which is you’ve made a list of your debts. The problem is you don’t know what to do next.
The answer most people choose is debt consolidation.
What is debt consolidation?
The simplest explanation of debt consolidation is it’s where you combine all, or nearly all, of your existing debts together in a way that makes it easier for you to pay them off. There are four proven ways to consolidate debts, so it’s important to choose the one that best fits your financial situation.
Option #1: Get a loan
One of the most popular ways to get debt under control is with a low-interest debt consolidation loan. This is, as you might guess, where you get a loan and use its proceeds to pay off multiple debts. It can make sense when most of your debt is unsecured debt like credit cards, personal lines of credit, medical debts and department store credit cards. When done right, it can even help improve your credit rating by making it easier for you to repay the money.
Of course, the new loan needs to have a lower interest rate than the average interest rate of the debts you’re paying off. If you have a decent credit rating, you might be able to get a 3-year, fixed rate personal loan for $10,000 with an interest rate as low as 4.29%.
If you don’t have a decent credit score, and if you need to borrow more than $10,000, you’d be out of luck – unless you own your home and have some equity in it. In this case, you could borrow much more than $10,000, but the downside is that you’d be putting your house at risk.
Option #2: Do a balance transfer
Are the majority of your debts credit card debts? Then, a second option would be to transfer their balances to a new credit card with a lower interest rate. Let’s suppose you have four credit cards at 17%, 15%, 19% and 17%, which would mean an average interest rate of 17%. If you could get a new card with an interest rate of 12%, you’d have lower monthly payments and would save money on interest.
An even better alternative would be to transfer those credit card debts to a 0% interest credit card, where you might have as many as 18 months interest free. This would mean much lower monthly payments, and might be enough time for you to pay off the entire debt before your interest-free period ends.
This can be an excellent way to consolidate debts because it doesn’t require you to borrow any money. It means contacting a non-profit consumer credit counseling agency, where you would have a debt counselor that would thoroughly review your finances and then suggest either a budget or a debt management plan (DMP).
A DMP would consolidate your unsecured debts as you would no longer pay your lenders. Instead, you would send a payment each month to the consumer credit counseling agency, which would then disburse the money to your lenders.
Consumer credit counseling agencies usually charge just a minimal amount for their services like $25 a month to manage your DMP. However, your credit card companies will close your accounts, so you would have to learn to live without credit cards. And it generally takes four to five years to complete a DMP.
Here’s a video that explains more about credit counseling … and in just 60 seconds.
Option #4: Debt settlement
This option has become increasingly popular since the Great Recession of 2007. The reason for this is because it can save a considerable amount of money by settling, or paying off, debts for less than their balances.
While you can settle debts yourself, most people choose to use a debt settlement company. There are two important reasons for this. The first is that it’s also a way to consolidate debts because you would transfer a set amount of money each month to an FDIC-insured trust account instead of having to pay your unsecured lenders. As money accumulates in your trust account, the settlement company will use it – with your permission – to settle your debts. This process generally takes from 24 to 48 months, depending on how much money you owe.
The second important reason to use a debt settlement company is that it does the negotiating for you, which removes all the stress and strain of dealing with your lenders and maybe also debt collectors.
Debt settlement companies are for-profits and charge for their services. However, using one can still save you thousands of dollars and help you achieve the thing you want most – debt relief.