The average American has over $90,000 in debt. So if you’re reading this, you’re likely thinking about your number. Debt can be overwhelming, especially if you're tens of thousands of dollars in the red. There is a solution though, and that’s debt consolidation.
What is Debt Consolidation Anyway?
On a basic level, debt consolidation is the process of combining or condensing several types of debt into one lump payment. It can help you organize your finances and even turn your life around.
It isn’t a one-size-fits-all solution for all Americans. To qualify for consolidation, you need to have good credit, a regular income, and a plan for staying out of debt moving forward. Choosing the right consolidation plan is key.
Types of Debt Consolidation
There are two types of debt consolidation: loans and balance transfer credit cards. Each has its benefits and risks, so it’s up to you to make the best choice for your monetary future.
Consolidation Loans
Loans are a common method of consolidation and come in many forms. By taking out a loan in the same amount as your debt, you can use that money to pay back the original amount. Loans often have a more manageable interest rate, but that can vary by loan type.
Loan Types
Personal loans, or standard bank loans, often have lower interest rates and don’t require collateral, but are not a good option for consolidation if you struggle with credit. 401k loans also have low interest rates, since you’re borrowing against yourself, but they eat into future retirement savings and rely on your current employer or 401k provider.
Another option is a home equity loan. If you’ve already paid off a decent chunk of your mortgage, you can borrow against your house and pay off the rest of your debt. This loan doesn’t require a credit check like a personal loan, but often takes the longest to pay off. The major downside is that you could lose your home. If you’re willing to risk the collateral, this is a good option.
Balance Transfer Credit Cards
If you’re dealing with a smaller balance, you may want to look into a balance transfer credit card. By transferring your balance to a new credit card with the lowest interest rate possible, and focusing on paying off the new card only, you can erase your debt faster than with the loan method.
However, this does affect a number that strikes fear into the hearts of many when it comes to consolidation: your credit score. People are often rejected when applying for loans or lines of credit if their score is too low, so knowing how your number will change is vital.
The Long and The Short
Only you know your particular circumstances and what the best option is for you. Consolidation works for some people and tends to benefit those with strong credit and consistent income. If this describes your situation, then this might be the route to a new debt-free life!