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Trying to find ways to get a handle on your debt? You might consider debt consolidation, a process that can simplify your debt and possibly lower the amount you pay in interest on your loans. If you’ve been wondering how to consolidate debt there are several approaches you can take. Here are the pros and cons of debt consolidation.
How to consolidate debt
There is more than one way to consolidate debt. This is why it’s important to carefully consider each method before moving forward with a debt consolidation strategy.
1. Credit card consolidation
You might want to consider credit card consolidation if you have several cards with high-interest rates. In this scenario, you’d open a new credit card with a lower rate, such as a 0% APR card. Then, you’d transfer the balance of your other credit cards to the new card, potentially saving you a lot of money in interest and helping you repay your debt faster. You can check out our favorite 0% balance transfer cards here.
Pros
Credit card consolidation can result in savings on interest payments.
A lower interest rate can help you get out of debt sooner.
Simplifying several payments into one card, with one monthly payment, can make it easier to stay organized.
Cons
Your balance may be too large to transfer, in which case you would only be able to transfer part of the balance or none of it.
You might have to pay a balance transfer fee.
You’ll likely need at least fair or good credit to qualify.
Remember, if you do move forward with a credit card balance transfer, you’ll need to make sure that you close your original credit cards after they’re paid off. Otherwise, you could end up further in debt if you’re tempted to make purchases on the original cards in the future.
2. Personal loans
Some people use a personal loan to consolidate their debt. How debt consolidation works with this strategy is the borrower will take out a personal loan big enough to cover all of their outstanding debt. They use the funds from their loan to pay off all their debt, then focus on repaying the one loan.Check out Credible as well as your other personal loan options here.
Pros
If you have more outstanding debt than you can cover with a balance transfer credit card, a personal loan might help you get the total amount of money you need.
Unlike a credit card, with a personal loan’s set monthly payments you’ll know exactly when you’ll get out of debt if you keep up with payments.
Simplifying your payments to one monthly payment could make your finances less stressful.
The interest rate on a personal loan is traditionally lower than a credit card.
Cons
Depending on your credit, you might not qualify for the lowest interest rate.
You might not get approved for a loan big enough to cover all of your debt.
If you opt for a longer-term with lower monthly payments, you could end up paying more in interest over the life of the loan even though your monthly payments would be more manageable.
Paying off your debt with a personal loan does give you some control over what your monthly payments will be. It’s a good option if you need to lower your monthly payments. Just make sure that if you go in this direction, you keep these monthly payments as part of your household budget. Falling behind on your payments will negatively impact your credit score.
3. Home equity line of credit
If you have significant equity built up in your home, one option is to get a line of credit against this home equity. Once you’re approved for a home equity line of credit, your bank will typically give you a card, that looks just like a debit or credit card, with access to this revolving credit. You can use these funds for anything you like.
Pros
You might get a lower interest rate with a line of credit versus a credit card, especially if you already have a mortgage or account with the bank.
You could get a larger limit on your line of credit.
No debt transfer fee.
Cons
If you do not have significant equity built up in your home this might not be an option for you.
A line of credit is revolving credit, not installment credit, so repaying it could require more discipline.
There could be an annual fee associated with the line of credit.
If you decide to get a line of credit, make sure you create a payment plan that you can stick to. As you repay the line of credit, the funds will become available to you again, but you should make sure you don’t spend to the credit limit and instead focus on repaying all the debt.
Each debt consolidation strategy has different drawbacks and advantages and it’s important to figure out what your priorities are when it comes to repaying your debt. Determine which option can help you stay motivated to repay your debt, and calculate how fees (if any) will affect your overall savings.
