Contents
What is Debt Consolidation?
Debt consolidation is a strategy to manage your debt that is a way to eliminate, or at least pay down your debts. This takes multiple credit accounts that you might have and rolls it all into one loan. This can lower your monthly payments into something much more manageable.
This might look like having three different bills such as two credit cards and a personal loan. These have balances of $3000, $1000, and $1500, with payments of about $300, $100, and $150 per month. You could get a debt consolidation loan for a total of $5500 and have one monthly payment of about $300 so you save about $250 per month.
This can have two primary impacts on you and your credit history. You can use billigste refinansiering – or debt consolidation – to simplify your monthly payments and to lower your interest rates. This will end up saving you a considerable amount.
This can also have another impact on you. It can raise your credit score, even though it might lower it initially. After a few months, your credit report will show that you have paid off your old debts and only have one to pay each month and your credit score will rise again.
This article will help you to learn more about debt consolidation and how it can help you. It will also help you to understand what you need to do. You can also do more research to find the information that you need.
Signs That it is Time to Consolidate
If you are juggling many monthly payments, it might be time to consolidate, especially if you are having to pay just the minimum payments. This is often difficult if you have multiple payment dates and multiple institutions to pay. When you consolidate, you will combine all those debts into one monthly payment made to one institution.
Another reason to do this is if you have many high interest debts. This can happen when you open several new credit cards at once that have high interest rates. When you consolidate, you need to choose an option that lowers your interest rate – otherwise it doesn’t help you that much.
You want to do this when your credit history is still good. If you wait until your credit score begins to lower, you will have a more difficult time getting a consolidation loan. If your score is low, your interest rates will be higher, and you won’t end up saving any money.
You should also have your spending under control before you do this. If your spending is out of control, you will continue to spend money that you don’t have. Find a way to control your spending, either by improving your financial status or getting some other help to help you to stop spending.
While debt consolidation can help lower your payments, you still need to make sure that you can pay those monthly payments. If that will still cause issues for you, it might be time to talk to a financial advisor that can help you out. This would be especially helpful if your debt-to-income is too high for you to make the payments.
Ways to Consolidate Your Debt
A personal loan is one of the easiest ways to do this, especially if your debt comes from high interest credit cards. This is an installment loan that combines all your debts into one and allows you to pay one monthly payment at a lower interest rate. You just must make sure that you use the money from the personal loan to pay off all your debt and not get caught in the trap of using it for something else.
This can help you in a couple of ways. You can have one monthly payment that is easier to make. You can also have a lower interest rate that could lower the amount that you must pay.
Another way that you can do this is to get a personal line of credit, or PLOC. This is different than a personal loan in that you are given a certain amount of money and you can use it the way that you want or need. At the end of the month, you will have an outstanding balance, and you must make a payment on that. Once you make your payment, that amount will be available for you to use again.
The flexibility of a PLOC can have a downside, as well. Since there is a balance available to you each month, you are more likely to spend it on things that you don’t need. You might end up paying for the PLOC longer than you intended.
Still another way to pay off all your debts is to get a home equity line of credit, or HELOC. This is borrowing money using the equity you have built up in your home. These have longer repayment terms, lower interest rates, and might be better if you have larger loan amounts.
There are two phases of the lifespan of a HELOC – the draw period and the repayment period. The draw period is usually from about five to ten years, and you can draw money from your account during this time. The repayment period is the rest of the life of the loan, and you will only be able to pay your monthly payments.
There are drawbacks with this type of HELOC, as well. It gives you a long time to keep drawing from your account instead of just making the payments each month. This will keep it active longer and you will be paying more interest in the long run.
You could also have a credit card balance transfer to pay off your cards with higher interest rates. This works best if you have good credit, because you can find lower interest cards that will allow you to transfer your balances to them. Many of these balance transfer cards offer introductory interest rates that can be as low as zero percent.
You could also borrow against your 401(k) plan if you have one from your employer. This is an easy process that you can do. You can liquidate a portion of your plan savings account up to fifty percent of it. You then repay this each month just as you would with a loan.
The downside of this is that you lose out on returns that you could have had over the lifetime of the loan. Also, if you liquidate when your assets are down, you might end up losing money. You will have to see if the risks outweigh the advantages.
Potential Risks of Debt Consolidation
There are three risk factors that you need to consider when you are thinking about debt consolidation. The first is the fees that you will have to pay when you borrow. You will need to pay interest on most of the solutions.
You will also need to pay penalties if you do not pay your new loans on time. If you do a HELOC, you could lose your home if the payments are not made. You need to make sure that you have a repayment plan that you can afford.
If you have a line of credit, you could end up overspending again. This can happen with any loan if you don’t pay off your old debts and you choose to use the money for something else. You need to be meticulous with yourself and your payments.
Keys to Successful Debt Consolidation
You need to make a budget and stick to it because this will help you more than anything else. This will give you some insight into how you are already spending your money and allow you to add your new payment. Creating a budget will allow you to make room for basic living expenses, debt repayment, and savings. This will let you know how much money you have left for “fun” spending.
When you buy anything, don’t buy using a credit card – use debit cards or cash. This way you will not overextend yourself. Using credit cards can be risky when you are trying to reduce your debt.
You should prioritize your emergency fund in your budget so that you have that available when you do have an emergency. You want to build a sizable nest egg so that you won’t need to borrow any money when an emergency happens. This will help you to begin to live debt-free.
Conclusion
Debt consolidation is a way to take many debts to make just one. You can do this in several ways, but you must remember that you need to repay this loan. It doesn’t help to consolidate if you are not going to pay back the consolidation loan.