August 28, 2019
Debt can wreak havoc on your ability to achieve your financial goals. That’s why it’s critical to pay off debt as fast as possible so you can get your finances—and life—back on track. While it may feel impossible to get out of debt, debt consolidation can help you chip away at the burden and get back on track.
Here are five ways you can consolidate your debt.
As a homeowner, you have the option to access cash from your biggest asset: your home. You can access your home’s equity through a HELOC, home equity loan, cash-out refinance, or home equity investment. By using the cash you get from your home’s equity, you can pay off your debts in full.
The option that will make the most sense for you depends on your debt and your other financial goals. Compare your options using our guide to determine which is the best option for you.
Access your home’s equity without taking on a loan or monthly payment.
Depending on the amount of debt you have, you may be able to transfer it all to one credit card. As Credit Karma points out, if you transfer all your debt to a credit card with a 0% interest promotional period, you can avoid paying interest. You’d then have one monthly payment to focus on.
However, you’ll still need to qualify for these cards, which may require a good credit score. Plus, if you can’t pay off the debt by the end of the promotional period, you may end up paying more for your debt through higher interest. You’ll need to stick to a disciplined payment schedule if you want to avoid additional debt.
If you can secure a personal loan with a lower interest rate than the interest rate on your current debts, it may make sense to take out a loan to pay off your debts.
As Money Under 30 points out, personal loans don’t require collateral. That means they don’t require you to back the loan with assets like your house or car in case of nonpayment. You’ll still need a good credit score if you want to secure a personal loan, especially if you’re hoping for a low interest rate.
Debt settlement isn’t so much debt consolidation as it is payment consolidation. With debt settlement, a debt settlement firm negotiates with your creditor(s) to lower the total amount of debt you owe. You then make one monthly payment to a debt settlement firm.
While that may sound ideal, you’ll want to look into the details. The process can take months (and in the meantime, you’ll still be racking up interest) and the debt settlement firm will charge a hefty fee. You may even have to pay taxes on the amount of debt that was forgiven, and your credit score will take a hit—for seven years.
Consider this option with caution: If you have a retirement plan you may be able to take out a 401(k) loan. You’ll need to determine if your specific plan allows this and its terms. The good news is if you pay the loan back on time (usually five years), the cost to you is relatively low. As Investopedia explains, the interest you pay on the loan actually goes back into your own account. You can also repay the loan without fear of prepayment penalties and many plans may allow you to take payments out of your paycheck.
The bad news is if you don’t pay your loan back on time, you’re likely facing some serious financial setbacks. At this point, says The Balance, it’s considered an early withdrawal, which means you’ll face a penalty and income tax. You’ll also want to take into account your job status. If you leave your job, you’ll have to pay the loan back within 60 days.
Over 50 and have $0 for retirement?
The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.
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