Got more bills than money each month? Maybe it’s time to consolidate your debt. There are ways to reduce your interest and payment and, in some cases, even reduce what you owe. Here are 5 tips for debt consolidation.
Here’s the most important thing you need to know about debt consolidation – there are three types of debt consolidation programs:
Nonprofit debt consolidation: A nonprofit agency works with consumers who can handle their debt, and provides help with creating a plan.
Debt consolidation loans: Using a loan to consolidate your debt into fewer or a single payment with lower interest.
Debt settlement: Used when debt is unmanageable or not payable at its current level.
If you don’t have time to do the research and legwork necessary to consolidate your debt on your own – or simply prefer to trust the process to an expert who can make sure you are making all the right moves – your best move may be to work with a debt consolidation agency.
One nonprofit agency is The National Foundation for Credit Counseling (NFCC). They provide free credit counseling and have offices in 50 states and Puerto Rico. In addition to helping you create a debt management plan, can also help with advice on debt settlement and bankruptcy.
One way debt consolidation works is by taking out a single large loan that is used to pay off several credit cards or other unsecured debt. The larger loan has lower interest rates, which helps pay off the debt faster. The loan may be spread out over a greater amount of time, also making the monthly payments lower. Additionally, the single payment makes paying off the debt easier to manage compared to multiple sources of debt.
There are a few methods which are commonly used. If you are a homeowner, you can use a home equity loan or line of credit to consolidate your debt. If you have retirement savings, in some cases you can borrow against it to pay off debt. If you have decent credit, you can obtain a personal loan that has better rates than your current debt.
Debt settlement works by reducing what you owe, and many times can be a fraction of the total amount. In debt settlement, a creditor agrees to accept less than what is owed to resolve the debt. The creditor may agree to do this deciding that it is better to settle for a lesser about, rather than taking a loss or be forced to take expensive legal action. Such programs usually get the borrower out of debt within 2 to 5 years.
Bankruptcy is more like the nuclear option for getting rid of your debt. It blows your debt away, but causes a lot of collateral damage in the process. One of the few benefits is that bankruptcy stops creditors from harassing you. Debt consolidation or debt settlement is always a better option if you can manage it.
Here are a few reasons why bankruptcy can be a bad idea.