The best way to consolidate debt
Debt consolidation is the ideal way to conquer your debt – consolidate your balances into one loan and make one monthly payments until you’re debt-free.
While there may not be just one ideal way to consolidate debt, it is possible to narrow down the best options for your situation.
A personal loan is typically what people have in mind when they think about debt consolidation. The best solution here is a loan with a low interest rate and affordable monthly payments can be used to pay off other high-rate debt. This is a great strategy, provided you can find the ideal loan that you need.
That can be a challenge if your credit is not good enough. High amount of debt – particularly credit cards with balances approaching your credit limits, make it difficult to qualify for new credit.
When it works then it usually works out pretty well. You know exactly how much you have to pay each month until you are debt-free, if you get a personal installment loan with a fixed repayment period,. Rather than having a credit card with a high balance, carrying a balance on an installment loan is much better for your credit scores.
Before you start looking for one of these loans, you should make sure that you check your credit scores to see where you stand. It doesn’t make sense to apply for loans for which you wont be able to qualify. Also, knowing your credit score helps you in identifying the loans which are within your reach.
When it’s best: If you can get a personal loan with a low rate and repayment schedule, which allows you to pay off the loan in 3-5 years, then it is an excellent option.
Credit card consolidation
A low-rate credit card or 0% balance transfer offer may also be used to consolidate higher rate balances. But there may be a transfer fee (generally 2-4% of the amount transferred) and if the offer has an introductory rate, then it won’t last forever. Offers with extremely low rates – 3.99% for example – usually last for 12-18 months. Post that, the rate can jump significantly.
When it’s best: This option of consolidation works well for people who qualify for a low-rate balance transfer offer with low transfer fee and pay off the entire debt amount before the promotional rate expires. It also works best when there is no other balance or charges on the card while the transfer is being paid off.
Credit counseling consolidation
A Debt Management Plan through one of the credit counseling agencies is similar to getting a consolidation loan. If you enroll in a Debt Management Plan, you pay the counseling agency every month, and the counseling agency pays each of your participating creditors in return. Also, your monthly payment should be lower and your interest rates may be reduced as well.
You need not necessarily have a good credit rating to qualify for a Debt Management Plan, so it could be an ideal option for somebody with lesser credit. Typically, personalized budgeting advice is also part of the package, making it a good option for someone who needs expert advice.
When it’s best: A Debt Management Plan works wonders for someone who is not able to successfully pay off their debt by them self, and needs some extra help and support that a counseling agency provides.
Loan from friends or family
A friend, family member or relative may be willing to lend you the money to pay off your debts at a low interest rate, and also be somewhat flexible with the terms. There is usually no credit check, and since these loans aren’t reported to any credit reporting agencies, your credit score might actually improve if you use such a loan to pay off your credit cards with high balances.
When it’s best: This can be an excellent option when the lender and borrower are in agreement, and willing to put their agreement in writing to ensure that there are no misunderstandings.