It is quite easy to fall into debt if you tend to overspend and pay for all your necessities with a credit card.
Even if you work your ass off to manage your money properly, getting out of debt is very hard, considering the high-interest rates and multiple monthly payments hanging over your head.
If you are also stuck in a similar situation and can’t afford to pay multiple debt payments, debt consolidation can be an excellent tool to pay off your credit card debt and save money in the long run.
Here is what you need to know about the specifics of debt consolidation is and how it can help you interrupt the debt cycle for good. Let’s get started!
What is Debt Consolidation?
Debt consolidation is a form of money management strategy where you pay off your existing debts by taking out one new loan from a single lender at a lower interest rate.
If you have an outstanding debt of more than one credit card, you can apply for a consolidation loan to cover the amount of total debt and then repay the loan in monthly installments.
Debt consolidation makes it easier to pay off your debt without wiping out your balance.
By consolidating several payments into one fixed payment with a lower interest rate, you can save hundreds or even thousands of dollars and avoid late payments that can potentially hurt your credit score.
5 Ways to Consolidate Your Debt
There are several ways to consolidate your debt based on the amount and type of your debt.
Here are the five types of debt consolidation to meet your individual needs:
Debt consolidation loans are personal loans that are typically available through banks, credit unions, and online lenders.
Also, Debt consolidation loans generally have terms between one to 10 years, and you can consolidate up to $50,000.
However, they only make sense if your new loan has a lower interest rate than your previous loan.
Balance Transfer Credit Card
If you have multiple credit card debts, a Balance transfer credit card is the best option for you.
It transfers multiple streams of existing credit card debts with high-interest rates into one credit card and reduces the overall cost of the debt by lowering the interest rate up to 0% depending on your credit score and the card you qualify for.
Home Equity Loan
A home equity loan involves taking out a loan against the equity in your home. The loan amount is often used to pay off the existing debts, or home improvements.
Once the funds are released, the borrower has to pay the interest on the entire loan amount for a much lower interest rate between 5-30 years.
Student Loan Refinancing
Student loan refinancing is a process of combining federal student loans into a single loan backed by the government.
It allows you to consolidate both private and federal student loans into a fixed monthly payment with a much lower interest rate.
Home Equity Line of Credit
A home equity line of credit (HELOC) is also a loan secured by your home that gives you a revolving credit line to pay high-interest debts or cover hefty expenses.
It lets you withdraw funds at a variable interest rate, and as you repay your outstanding balance, the amount of the available credit is replenished, much like a credit card.
The loan term is usually longer, lasting up to 10 years.
- Cheapest Way To Get Out Of Debt
- How Does Debt Relief Work?
- Debt Relief Review Methodology
- Do Debt Relief Companies Hurt Your Credit?
- Consolidated Credit Reviews
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.