Getting into debt is all too easy in today’s money-centric environment. Credit cards with high limits make it a breeze to spend above our means, and an unexpected bill out of the blue when no emergency savings exists can result in turning to debt to cover it. No matter the cause of debt, it can feel a bit intimidating to find a smart way out of high monthly payments and the interest charges that come with revolving balances. Fortunately, you may have a solution in one of these common debt consolidation options.
Personal loans, offered through a traditional bank or credit union, or an alternative lender online, can be a smart way to consolidate your debt. Consolidation through a personal loan gives you the opportunity to see the light at the end of the debt tunnel by picking a payoff term (typically from one to five years) while establishing a fixed monthly payment that works well with your budget. Compared to credit cards, personal loans often carry a lower total interest rate which can save hundreds to thousands over the life of the debt.
When considering a personal loan for debt consolidation, make sure to read the fine print, understand the fees charged, and determine what is affordable for a monthly payment for the length of the loan. Also, most banks and credit unions require a relatively strong credit history to qualify for a lower interest rate, although you may be able to find other options through alternative lenders online.
Consolidating debt with the help of a credit card balance transfer may also be a viable option to get out from under double-digit interest rates. A balance transfer allows you to move one credit card balance (or loan) in full or in part to a different credit card with an interest rate as low as 0%. It is important to note that balance transfer offers with little to no interest are typically for a much shorter period than personal loans – ranging from 9 to 21 months. If you have a smaller balance and the ability to qualify for a new card with a balance transfer promotion, this can be a lifesaver regarding debt consolidation.
Before jumping on the balance transfer train, consider the fees associated with making the move which cost between 1 and 5% of your balance being transferred. Additionally, if you are unsure you can pay off the full balance in the promotional period, consider an alternative since you will be charged interest as soon as the offer period ends.
Homeowners have additional options when it comes to debt consolidation. A home equity line of credit or a home equity loan can offer low-interest borrowing from the equity accumulated in your primary residence. These debt tools are typically provided through banks and credit unions, and similar to personal loans, may save you’re a significant amount of interest charges while you pay down your balance. A home equity line of credit is more flexible than a home equity loan, but both strategies can work to pay off high-interest rate debt.
Because home equity products require borrowing against property, they may come with higher fees than other debt consolidation options. Homeowners must also have available equity in their home before a lender extends one of these options at a low interest rate.
Consolidating debt may also be done by taking out a loan from your retirement account through work. This option should be a last ditch effort if you are unable to secure lower-interest solutions through other means. Taking a loan from a 401(k) is an easy process that does not require a check of your credit in most cases, but the amount of funding is limited to a percentage of what you have available in your account. Also, it does require repayment and carries interest, although payment terms can be extended for months or years and interest is credited back to your retirement savings instead of a bank. Most consider retirement assets most if not all of their nest egg for the future, so proceed with a loan against any 401(k) balance with caution.
Debt does not have to cost an arm and a leg if you know the tools available to reduce the interest charges and ultimately pay off your balance. Start with the basics of personal loans and balance transfers before accessing long-term assets like your home or retirement plan, and above all else, know what you can afford on a monthly basis for timely repayment. But if you’re not comfortable taking out yet another loan, there are other ways you can manage your debt or get help from a professional.
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