You are well on your way to reducing your consumer debt! In this part of the series, we will discover how to restructure and consolidate debt.
Debt consolidation is a great option for those who need just a little more than our best debt payoff strategies offer. Whenever you consolidate your debt, you take out a loan to pay off all of your debts, resulting in you simply having this one monthly payment.
Let’s picture a hypothetical scenario where a person has 3 credit cards and a medical bill that combined total $10,000. It may be possible to get a $10,000 loan from a bank. They then use this $10,000 to pay off the credit cards and medical bills. Instead of paying on these 4 separate bills, they only owe one monthly payment to the bank.
Is debt consolidation right for me? It is one of the more common questions that get asked. The answer is: Maybe so, maybe not. If you think it is time to consolidate debt, it often involves having at least somewhat decent credit. You also may need to pay your debts down a bit and get their balances lower before you qualify.
Easiest Ways To Consolidate and Restructure
Every single person out there has a different economic and financial standing. There is no definitive answer on the best route for debt consolidation, but I can certainly tell you about some of the easier and more effective ways:
Personal Loans – If your current debt obligations haven’t tarnished your credit, you may want to consider a personal loan. This is a loan where you don’t need any collateral. It’s based solely on your credit history, income, and current debt obligations. Many banks and credit unions have personal loans specifically for debt consolidation. (They may call them debt consolidation loans.) Compared to other loan types, personal loans can have kind of a high-interest rate. But it’s still going to be lower than any credit cards you’ve got.
Home Equity – If you’re a homeowner, then you may be able to tap into the equity in your home to pay off your debts. This is an especially great option for larger 5-figure debts. A lender may take out a second mortgage on your home for the debt consolidation, or you may be able to refinance your mortgage for a lower rate and get cash out for debt consolidation in the process.
Using the equity in your home can be a tricky process. Our debt series is going to have an article that specifically covers mortgages, equity, and refinances. If you’re considering this option you may want to see what kind of information is in our mortgage write up.
Zero-Balance Transfers – If all of your debt lies solely in credit cards, and you’ve got the discipline to not run up a balance on them again once they’re paid off, then a zero-balance transfer may work for you. Credit card companies have high competition with each other. To win over new clients, they may offer to pay off your old credit card debts, and you will owe them the money instead. To sweeten the pot, they usually offer no interest on your payments for the first 12 months.
There are two things we want you to remember if you’re considering consolidating your debt.
- Debt Consolidation Doesn’t Erase Debt – You still owe this money. It may feel like a relief to know that you don’t owe to multiple creditors. But the debt still exists. It would be best if you still were responsible for it.
- Many Debt Consolidation Companies Are Scams – If you go around googling for debt consolidation companies, then there’s a decent chance you might get ripped off. The best place to start is with your local bank or credit union.
*Is your debt primarily made up of medical debt or student loan debt? If so, hang tight and stick around for the next part of our series where we show you how to attack medical debt and student debt specifically.