Debt consolidation is basically a form of refinancing to help people pay off their debts in a less stressful, and cheaper way. If you have several credit cards, bills, or personal loans that you just cannot pay off, you may need to consolidate your debt. Consolidating debt is when you take out a loan to cover all of your debts, and then pay back one monthly bill at a lower rate of interest. You can do this by transferring all your high-interest credit card debt onto one, lower interest card, taking out a new loan, or enrolling in a debt management program.
The option you choose is all dependent on your situation. It generally takes 3 to 5 years to get out of debt, but you should try to take the option that gives you the most time.
Homeowner Options
If you have equity and the interest rates you’re being offered are favorable to your case, refinancing your home could be a great option. You can have extra cash available to pay off your bigger debts, and pay back your refinancing loan in more affordable, monthly installments. You could also take out a HELOC (a home equity line of credit) or finally, you could take out a fixed-rate home equity loan.
- Pros
You can make the most of lower rates of interest on home loans as compared with double-digit interest rates that generally come with credit card repayments. Choosing this option can give you a great deal on closing costs which can, again, save you some money.
- Cons
Putting your home on the line can be very risky. If you opt for a variable-rate loan, you have to remember that rates can go up as well as down. You have to be very trusting in yourself for this option to go in your favor – be sure you don’t overspend or extend the length of time you’re in debt.
Cardholder Options
This is probably the easiest option to choose – you can ask your current lender to offer you a new, low-interest card to transfer all your debt onto. It is cheaper for most lenders to keep their current customers than finding one to replace you, so remember that.
- Pros
You can do this all over the phone, and you have absolutely nothing to lose with this method.
- Cons
It all depends on your payment record – if you’ve been unreliable, you might not qualify.
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Posted on May 18, 2023