Debt consolidation: Which option should you select?

Hi there! Are you tired of managing your multiple debts?

If yes, then you might be looking for a way out! Managing multiple debts means handling different outstanding payable amounts with different due dates!
Moreover, having a large number of debts is not good for your financial life! Because a substantial amount of your paycheck is likely gonna be deducted to pay off those debts!
So, ultimately, you are left with a very little or no money every month! And eventually, you might be living paycheck to paycheck!
Wait! Are you getting worried? Please, don’t be! We are there to help you with your debts!

The best way to manage your multiple debts is debt consolidation! And in this article, we will discuss why debt consolidation is important for you?

By the way, have you heard about debt consolidation? Hopefully, your answer is “YES!”
You know what? I have always wondered why consolidating debts is considered to be one of the finest and artistic money management procedures!
Trust me, once you opt for debt consolidation, you will understand that it’s one of the strategic ways to pay off debts with ease!

But what exactly is debt consolidation?
Well, debt consolidation is a method of “consolidating” or combining unsecured debts into a single payment every month.
However, remember that consolidating your multiple unsecured debts doesn’t reduce your total debts! It helps you to manage your debts properly as you don’t need to make multiple payments every month!
Well, before we proceed, let me tell you one thing!

debt consolidation

This post is made, especially, keeping credit card debt in mind! We will try to exhibit our discussion centering credit cards, with occasional touches on other types of debts too.

A credit card is viewed as the most potent form of debt that today’s US consumers hold!
A recent CNBC report reveals that the credit card debt in our country has an all-time high of $930 billion!
Isn’t it shocking?
Hence, this post will be giving suggestions, speculating any random reader as a victim of credit card debt! However, no need to worry, buddy! Debt consolidation behaves quite the same for all types of debts.
Precisely, it is nothing but trying to have one/consolidated payment for all your debts!

What is it that gives consolidation a precious position in the debt and finance industry?

  1. 1 Relief from multiple payments for your debts
  2. Gone are those days when you used to be worried about how to manage your debts. Because managing multiple debts is a cumbersome task to do.
    Debt consolidation brings you relief from these multiple payments for your debts! You just need to make a single payment every month for your multiple debts. As I said earlier, you owe the same amount of debt undoubtedly! But unlike before, you have to focus on a single debt source!

  3. 2 Boosts your credit score
  4. Yes, you heard it right!
    Let’s say, you have 3 credit card debts. And let’s consider that each has a limit of $1000, and on each, you are carrying balances of $500, $400, and $100, respectively.
    There’s a factor called the credit utilization ratio, which accounts for 30% of your credit score. Then I hope you can understand the importance of this parameter of your credit score! It is also called the debt to credit ratio and is calculated like this:
    [(Total debt / Total available credit) *100%] = Utilization ratio (or the utilization percentage).
    Financial experts often advise keeping your credit utilization ratio below 30%. Doing so, your credit score will improve with time!

    credit score

    Now, in our example:

    Total available credit = ($1000 * 3) (for the 3 credit card limits) = $3,000
    Total outstanding debt for the 3 cards = ($500 + $400 + $100) = $1000.
    Therefore, credit utilization percentage or ratio = (1000 / 3000) *100% = 33.33%.

    Now let’s say, you want to go for a consolidated payment for all of your credit cards. And you want to opt for the credit card balance transfer method. In this method, you have to take out another card and transfer all your existing credit card debts into this new card. In this example, you need a card that at least has a $1000 credit limit.
    Assuming, you take out a $1000 limit card, your new utilization ratio will be:
    {$1000 (total debt) / $4000 (3 existing credit cards’ limit + the new card limit)}.
    Keep in mind that the balances on the existing cards become zero, once the transfer is done! This gives us 25% as our new ratio. It is better than 33.33%

  5. 3 Reduction of your interest rates
  6. One of the bad things about credit cards is the high-interest rates! What if you get a chance to reduce the high-interest rates of your credit cards!
    Yes, it’s possible if you take out a balance transfer card or a personal loan to consolidate your debts.
    But make sure that the new loan has a much lower interest rate than your existing ones! In the case of balance transfer cards, you might get a 0% interest rate for an introductory period.
    So, lowering the interest rate means your monthly payments will likely be reduced too! That means, you will be making a single payment every month and saving money on interest payments too!

    However, make sure to read the terms and conditions carefully before you opt for a balance transfer card or a consolidation loan!

    interest rate reduction
  7. 4 Offers you a bouquet of options!
  8. Debt consolidation has different approaches to different debts! It’s a broad term that asks for one payment for several debts! Only one payment, which will get proportionately divided among all the debts.
    For credit cards, you can opt for the balance transfer method. It’s a nice way to manage debts, or you can take the help of a genuine consolidation company too.
    For paying off other general unsecured loans/debts, you have the option of taking out a consolidation loan (a type of personal loan), or again approach a consolidation company for pro-help!
    But let me tell you one thing, buddy!
    Debt consolidation is exclusively designed for unsecured debts! For mortgages or car loans, there is no role of consolidation, in its true sense.
    So, what are you thinking?
    Are you planning to opt for debt consolidation for paying off your debts? If yes, undoubtedly, it’s a great decision!

What are the best possible debt consolidation options?

Here you go!

You can approach a genuine debt consolidation company to consolidate your unsecured debts. The reason being, if you want to take out a balance transfer card or a consolidation loan, you need to have a decent credit score!
But to opt for a debt consolidation program, you don’t need to meet any credit score check.
Rather, once you register with a genuine debt consolidation company, all your debt problems will be taken care of!
The expert financial coaches will analyze your financial situation along with your debt amounts. And they will negotiate with your creditors to reduce the high-interest rates!
Based on that, the consolidation company will provide you a payment plan and a budget. Besides, any late fees or penalties will be waived off!
Eventually, it will help you to pay off your debts in an organized manner!
So, once your creditors agree, you can start making a single payment every month to the consolidation company! And in turn, the company will distribute the money among your creditors!
This payment plan has helped many debtors in the past, by forcing them to change their spending habits permanently, for good!
It is the method of transferring all your high-interest credit card debts into a single loan with a much lower interest rate. Many cards offer 0% interest rate for an introductory period of about 1`8 to 24 months.
So, by opting for a balance transfer card, you can save money on your interest payments. Besides, you just need to make a single payment every month towards your new loan to pay off your multiple credit card debts.
If you qualify for a 0% interest rate card, I would suggest you try to pay off your credit card debts during that introductory period to brace yourself from interest payments!
Read:What is a balance transfer and its advantage and which mistakes to avoid
A recent Bankrate study has revealed that most of the applicants for personal loans were looking for funds to consolidate debts!
By taking out a consolidation loan, you don’t need to make multiple payments for your credit cards. You just need to make a single payment every month towards your consolidation loan. That’s it!
You will find various creditors offering personal loans to consolidate your debts. The APRs usually vary from about 6.99% to 35.99% depending on the loan amount, loan terms, and of course, your credit score!
So, if your credit score is too low, you might not qualify for a consolidation loan or the APR might be too high!
In that case, you can look for other options to consolidate debts or you can wait to improve your credit score!
Read: How to get a personal loan: Factors and steps to remember
Well, your equity on the property is the value of your home deducting your primary mortgage amount. So, a home equity loan or a HELOC is a second mortgage that you are using against your home!
That means you are risking your home by keeping it as collateral to take out a loan for paying off your debts.
If you take out a home equity loan, you are borrowing a lump sum amount of money with a fixed interest rate. Whereas, in the case of a HELOC, you can borrow multiple times from a maximum available loan amount!
If you are willing to consolidate credit cards, a home equity loan can be a good idea! The reason being, by taking out the lump sum amount, you can pay off your existing debts. And start making single monthly payments to pay off your home equity loan!
And guess what?
As the home equity or a HELOC is a secured loan, the interest rate is much lower!
However, I would suggest you consider a home equity loan or a HELOC as the last resort to pay off your debts. Because, if you are unable to repay the loan, it can lead to serious consequences including foreclosure!
Moreover, a home equity loan usually considers the current value of your home. So, you may have to shell out money for a new appraisal of your home!

Does your employer offer a 401k?
If yes, you can take out a loan from your 401k to consolidate your credit card debts.
Earlier, you could take out a loan of up to 50% of your retirement savings, and the amount was capped at $50,000.
But according to the CARES Act, you can borrow up to 100% of your vested account balance of your 401k.
Usually, the loans from 401k are cheaper than credit cards. And frankly speaking, you will pay interest to your account!
Well, that’s a good option for debt consolidation! But let me tell you, COVID-19 has just devastated our global economy, and the US economy is no exception!
You might know a humongous number of people have applied for unemployment benefits. And many people are getting a pay cut due to massive losses in businesses.
So, if you lose your job during this COVID-19 pandemic, you may have to make the repayment much earlier. Or, your retirement account balance will be reduced by that amount, considering it as a distribution!
So, why would you compromise your retirement account?
I would suggest you consider taking out a loan from your 401k as one of the last resorts for debt consolidation!
Read: Should you take out a 401(k) loan to consolidate credit card debt?

Well, peer-to-peer loans are arranged by various platforms like Prosper, LendingClub, etc. They will connect investors who are willing to lend money to you.
Once the loan agreement is finalized, these platforms will collect the principal and the interest amount from you. And they will deduct a certain fee from that amount and will send it to your lender.
You can take out a peer-to-peer loan of any amount ranging from about $25,000 to $50,000. The interest rate usually ranges from about 5.99% to 35.99% depending on your credit score.
Remember, a peer-to-peer loan is also unsecured debt. That means you don’t need to keep any collateral. But you need to have a decent credit score for getting a preferable interest rate and loan terms.
If you get a much lower interest rate than your existing debts, you can consolidate your debts through a peer-to-peer loan.
Thereby, you can pay off your multiple debts by making a single payment every month, and save money on your interest payments too!

However, peer-to-peer loans are not available in every state of the US. For example, Prosper is not available in Iowa, Maine, North Dakota, and Pennsylvania. And Lending Club is not available in Iowa and West Virginia.

debt consolidation options

Well, looking at the present scenario due to COVID-19, I would suggest opting for a balance transfer card or debt consolidation program or consolidation loan for debt consolidation!
Because these are comparatively safer options for debt consolidation as you don’t need to put your home or retirement account at risk!
However, if you are not having a decent credit score to take out a balance transfer card or a consolidation loan, I would recommend you to opt for a debt consolidation program. A genuine debt consolidation company can help with paying off your debts with ease. And they can help you to keep your finances on track too!
So, to help you decide in a better way, let’s summarize the key points of the balance transfer, debt consolidation program, and consolidation loan once!

Category Debt Consolidation Loan Balance Transfer Method Debt Consolidation Program
Counseling NO NO YES
Monthly payment reduction YES YES YES
Unsecured debts repayment YES YES YES
Credit check YES NO NO
Continuing credit card usage YES* YES* NO
Complete professional guidance offered NO NO YES

*It is highly advised NOT to charge credit cards while paying them off through debt consolidation. It will pile up more debts for you. And it will be a cumbersome task to pay off that huge amount of debt.
The bottom line is, undoubtedly debt consolidation is important for you if you are reeling under debts! But you have to analyze your situation and based on that, you have to choose the best debt consolidation for yourself!
And for you, we have mentioned the best possible debt consolidation options above. Hopefully, it will help you to decide which debt consolidation option to choose!
Lastly, always remember that debt is a burden to your finances! It becomes a hindrance to your saving process. And eventually, you may have to compromise with your financial goals!
So, opt for a debt consolidation option and get rid of your debts with ease! And don’t forget to let us know your experience once you become a debt-free person shortly!