How to Consolidate the Debts You Have
Consumers who want to consolidate the debts they have can choose from an array of consolidation methods. We'll explain the most popular and effective consolidation strategies here.
Bank Loans
Banks and credit unions offer two types of loans that can help you consolidate the debts you have. The first is a secured or unsecured personal loan. Depending on your creditworthiness, you may or may not have to put up collateral in order to secure a personal loan. The interest rates on personal loans are lower than those of credit cards, but not as low as those of home equity loans. Personal loans are usually for relatively small amounts, so not all consumers will be able to pay off all of their balances with a personal loan.
The second type of bank-issued consolidation loan is a home equity loan, or a second mortgage. With a home equity consolidation loan, you consolidate the debts you have by cashing in on the difference between your home's value and what you owe on your mortgage loan. You then apply these funds to paying off your high interest debts and instead make monthly payments on the home equity loan. We've summarized the pros and cons of bank loans as a debt consolidation method below.
- Relatively low interest rates
- Make one monthly payment on the loan
- Interest on home equity loans is tax-deductible
- Bank loans require borrowers to meet stringent credit criteria
- Secured consolidation loans, or those attached to a vehicle or a house, are risky
Professional Consolidation
If you consolidate the debts you have with a consolidation company, no loans are involved. Instead, the way in which you make payments is altered in order to assist you in becoming debt-free faster and in a more affordable way. Your consolidation service will bundle your current debts into one payment, possibly changing your interest rates when they do so. After they have consolidated your debts, you will make one payment every month to your consolidation service instead of directly to your creditors. The consolidation company will then handle the distribution of the payments to your individual credit card issuers. Usually, your interest rates and monthly payments become more affordable after consolidation takes place. For this service, you will pay a one-time commission charge and a recurring administrative fee.
Credit Card Transfers
Another popular consolidation method is the credit card balance transfer. The goal of a transfer is to move debt from a card or cards with high interest rates to a card with lower interest rates. The main advantage of credit card balance transfers is that they are relatively easy to do. Most card issuers allow borrowers to complete the transaction online. On the downside, balance transfer rates are usually temporary, meaning the rate you are offered initially will eventually expire. Once this happens, you will either have to pay the balance off, complete another transfer, or pay the standard high interest rates.
