The best way to consolidate debt

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People often struggle to get in control of their debt, and debt consolidation often appears like the right path to take. One monthly payment and all balances in a single loan seems like considerably less stress for you.

Yet, there may be more than just one way to consolidate: the trick is to choose the one option that makes sense for your case.

Personal loan

When evaluating consolidating options, people often aim at consolidation in the form of a personal loan. What you definitely need is a monthly payment that you can afford and a loan with a low-interest rate. However, although this sounds like the perfect solution, it may be hard to get if your credit is blotched. If you have credit cards with balances close to credit limits, you may not get a new credit. In such situations, a too high level of debt can disqualify you for another loan.

If you pass the qualification ‘exam’, then, things should work smoothly: with a fixed repayment period on a personal installment loan, you’ll know exactly how much of your budget sifts towards debt repayment. An installment loan may also prime up your credit scores, and help you see the progress you’re making toward a debt-free life. The fixed monthly payment also protects you against faulty financial decisions: minimum payments and huge debt longevity.

Only people with good credit scores qualify for such loans. If this is not your case, don’t waste precious time on a wild goose hunt. Knowing your credit scores allows you to identify the loans within reach. You can get two free updates on your credit scores with the Credit Report Card, on Credit.com. You’ll also receive notifications on loans that correspond to your borrowing profile.

The best terms on such a personal loan would be to get a 3 to 5-year repayment schedule and a low rate.

Consolidating to a credit card?

There are ups and downs to credit card consolidation, and unless you know them, your debt elimination journey will be an exhausting one.

Working similarly to a personal loan, consolidation to a low-rate credit card could make a viable option. Some lenders offer 0% balance transfer for the consolidation of higher rate balances. Yet, transfers are shallow waters that run deep: they have fees (2-4% of the transferred amount), and even if the offer comes with an advantageous teaser rate, the vanilla period doesn’t last forever. Low rates of under 4% usually last up to 18 months, then, there is an abrupt jump in the rate.

When you consolidate several balances into a single credit card, you generally use a considerable part of the credit you still have available. This negatively impacts your credit score until you pay it to the last dollar. Carefully analyze such a gain-loss situation to see if this type of consolidation could work for you (use  Credit.com’s Credit Report Card to determine the impact of your debt on credit scores).

The best case scenario? You qualify for a low-rate balance transfer, you get a low transfer fee and you manage to repay the full debt before the expiration of the teaser period. The most favorable situation is  when you have no other charges or balance on the card while the transfer is being paid off. If this is not the case, you could enter a maze of multiple interest rates, and it will be hard to find your way out of it by keeping track of the amount to pay before retiring the transferred balance.

Debt Management Plan for credit counseling consolidation

A Debt Management Plan available through a credit counseling agency is similar to debt consolidation. You make a single monthly payment to the agency and the agency then pays each of your lenders from this amount. The advantage of getting a Debt Management Plan (DMP) is that you could get a lower interest rate or decrease the monthly payment.

Cambridge Credit Counseling Service reported an average 14.6% reduction of the interest rate for clients who opted for one of their DMPs, over the last six months of 2012. The interest rate was reduced from 22% to 7.4%. $139.26 was the average monthly saving achieved through this reduction of the interest rate.

DPM is a viable choice even if you don’t have good credit history. In fact, the credit score is not a qualification requirement for a debt management plan. Agencies also address their client’s individual needs by providing customized budgeting advice.

When is DMP the best choice? A debt management plan could be the ideal solution for someone who has difficulties handling debt on their own and needs professional support.

Borrowing from family and friends!

Borrowing money from a more flexible and trustworthy source could be an advantageous way to pay off credit cards with high balances. Such a loan will usually have a lower interest rate, there is no credit check and the credit scores may actually improve through such debt consolidation.

However, borrowing money from family or friends could ruin your relationship if issues arise. This may happen if you fail to pay back the money. Weigh the pros and cons before risking your friendship!

The best case scenario? If borrower and lender agree to put all the terms of their arrangement on paper, further misunderstandings may be avoided. In some cases, a borrower who can’t pay back his debt may be forgiven for it, if the lender can afford it.

Pay off debt from the retirement plan!

Savings are often made in the form of a pension or retirement plan like 401(k) or 403(b). It is possible to borrow against these funds. The interest rate is low and you don’t pay the money back to a lender but into your own account. Qualification requirements do not involve a credit check or a good credit score.

Having all that money stashed away seems like the life rope. Yet, things are not what they seem. If you don’t put back the money, there follow penalties and taxes. Moreover, you may feel the blow of a rush decision, in the years to come, after you retire.

Using the retirement money to pay debt is a big decision sometimes with a dramatic outcome. There have been cases when people used retirement funds for consolidation, yet, they still ended up bankrupt. Do not use the retirement money without serious financial consultancy. You should not use these savings to help you pay utilities bills. A retirement loan may seem cheap, but it can suddenly become incredibly costly.

What is the best case scenario? The retirement loan is your last choice if you don’t qualify for other low-rate consolidation loan. You must be sure that you can pay the money back even if you lose your job. Take this decision only after getting advice from a bankruptcy attorney or from a credit counseling agency.

Although consolidation can help you eliminate debt, there are lots of roads that lead to consolidation. This road may be longer or shorter depending on individual circumstances.

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