Consolidating multiple loans into a single monthly payment can help you escape financial trouble without having to file for bankruptcy. Here are some of the best ways to consolidate debt:
Take Out A Personal Loan
Personal loans are unsecured (don’t require collateral) and are a great way to consolidate multiple credit card balances into one monthly payment. Credit unions, banks, and various online lenders offer personal loans.
Personal loans come with the advantage of having a fixed interest rate, which means you have to pay the same amount every month and on the same date. Additionally, if you have good credit, you may get a lower interest rate than what you have on your credit cards.
However, remember that low-interest-rate personal loans require you to have a high credit score. If your score is less than 600, you’re likely to be offered a higher interest rate, defeating the purpose of consolidating debt. Also, you’re required to pay origination fees to lenders when you take out a personal loan, which means the money you should be using to pay down debt gets spent.
Credit Card Balance Transfers
This do-it-yourself consolidation method involves transferring multiple credit card balances to a single lower-interest-rate credit card. Certain credit card issuers offer a no-interest-rate period to customers, which lasts for an introductory period of usually 12-18 months. To use this debt consolidation technique to your full advantage, you must pay off the balance during the introductory period. If you fail to do so, you end up having to pay off a high-interest-rate debt again.
Balance transfer cards are of different types, including some that have longer zero-interest-rate periods and some that don’t charge transfer fees. These cards help you save on interest, letting you focus on paying off the principal.
However, most balance transfer cards charge a fee of 3%-5% on the debt you shift, adding to what you’re required to repay. Moreover, you must be approved for a high-enough credit limit to use your card to pay off multiple credit card balances.
Some other ways to consolidate debt are consulting a nonprofit credit counseling agency to come up with a debt management plan, borrowing from a retirement savings plan like a Roth IRA or a 401(k), or using a home equity loan or a home equity line of credit (your home is used as collateral).