Debt consolidation is a way to pay off all of your other financial obligations so that you have only one payment to make each month and at a lower interest rate. It’s a proven way to get out from under a crushing load of debt. It will probably take you longer to pay off debt consolidation then credit card debt or medical bills but you will have such a much lower payment that taking more time to pay off the debt could still be a better solution.
The most widely used method of debt consolidation
Probably the most popular and most widely used form of debt consolidation is an unsecured loan. The biggest benefit of an unsecured loan is that you will have a fixed rate of interest that won’t change no matter how financial conditions change. The payment on an unsecured loan becomes a fixed cost that you can budget for each month, instead of having to worry about making many different payments to many different creditors on many different dates.
A second way to achieve debt consolidation is to take advantage of the one of the many charge card balance transfer promotions available today. The strategy here is to transfer debt that you have on high interest charge cards to one with a lower interest rate. For example, you might transfer the balances on three credit cards with interest rates of 16%, 19% and 21% to a new card that has an interest rate of just 12%.
Zero balance transfer credit cards
Today, you can get what are called zero balance transfer credit cards. This is where you transfer your data to a new card that requires no payments for anywhere from six to 18 months. However, be aware that some of the credit card companies will charge a fee for this service, which is generally 3% of the amount of debt being transferred. You might not want to transfer a large amount of debt to one of these zero balance transfer credit cards as you will eventually have to start paying interest on it and when you do, the interest can zoom to anywhere from 12% to 20%.
A second mortgage
The third of the best debt consolidation techniques is to use your house to get the money you need to pay off your debts. There are two ways to do this. First, you may be able to refinance your mortgage. Suppose that your home is worth $200,000 but your mortgage is just $150,000. You might be able to get a new mortgage for $200,000, pay off the existing mortgage and use the difference–the $50,000–to pay off your debt. As an alternative, you could get a second mortgage–again if you have enough equity in your own. This is often a Homeowner’s Equity Line of Credit or HELOC. Using your house is probably a better idea than transferring your balances to a new card because you will get all your creditors off your back, and a better interest rate. You will have more time to pay back the loan and your payments will be fixed–so you can just budget for them just as you would with a car loan.
Not without risks
While a consolidation loan can be helpful, it doesn’t come without risks. For example, if you use the equity in your home to get the loan (called a secured debt consolidation loan), and you default on the loan, the lender can force you to sell the house you pledged as collateral for the loan, and you could literally wind up out on the street.