Debt Consolidation Tips
Debt consolidation is another method for getting out debt, and used properly, can be the difference between living debt free and filing for bankruptcy. Of course, debt consolidation is not the solution to the problem (creating and sticking to a budget is) it is a tool that can help you pay off your debts faster.
Here are several debt consolidation tips to get your started:
Debt consolidation is based upon a simple premise: if you are able to pull your debts together into a lump sum, you can negotiate better terms for that one debt - such as lower interest rates and lower monthly payments- than you could for each individually. These individual debts are paid off in full when you consolidate, leaving you with one creditor holding the whole sum.
You should consider debt consolidation only if you can lower your overall interest rate and monthly payments at the same time. For example, if you have three credit cards with 17%, 18% and 20% interest and you consolidate your loan through a bank and pay 12% for all of it, you'll have more money left over each month, which can be used to further pay down the existing debts.
When consolidating your debts, make sure they are fixed interest rates. Sure, that new credit loan may have a lower rate today, but next month you could be in deeper debt than ever. The key is to lump your debts together and pay a fixed amount each month. It's easier to track one fixed monthly payment than five variable debts with different companies.
The most popular form of debt consolidation is to transfer your debt to credit card with a lower interest rate. While the rates aren't as good as the alternatives, lower interest credit cards are easier to get. Before you transfer a balance over, make sure to read the fine print and call the credit company to have them explain all the fees associated.
Another option is to apply for a bank loan. These debt consolidation loans tend to offer better rates but are harder to get. You can apply for a debt consolidation loan outright, or secure the debt with an asset such as your home, car or use refinance your mortgage.
Thirdly, you can borrow against your life insurance policy. This only works if you have a whole life policy (rather than a term policy), which allows a cash balance to accrue inside the policy. Other policies that work are universal or variable universal life insurance.
Lastly, consider taking a loan from your retirement account. This is a lot smarter than it sounds initially. Retirement accounts often pay low interest to you and are created for the long term, whereas your current debt is charging you high interest and requires immediate attention.
On paper, these debt consolidation tips are a surefire way to reduce debt. However, many people are not good at managing money, that's why they're in debt in the first place! Commit to paying off this consolidated debt before taking on any other loans.
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