Debt Consolidation, Considering All Options
Defined as a combination of multiple debts, loans, and payments into an easier-to-manage single loan, a debt consolidation loan is a loan to pays off all the others; one which is more likely to have a lower monthly payment or a lower interest rate or both. Whether it be credit cards, car loans, or store cards etc, a debt consolidation loan can be used to pay off all of them.
There are many ways to consolidate that mountain high pile of your debt. From taking out a personal loan, or a credit card transfer to borrowing from a retirement account, you have multiple options to choose from.
Credit Card Balance transfer
A transfer of the balance of credits cards is a way to consolidate your debt. This is a type of transaction where you move the balance of one credit card to another to take advantage of a lower interest rate and consolidate the higher rate balances. Keep in mind that most credit cards carry a transfer fee (usually 2-4% of the transferred amount) and offer significantly low-interest rates as a ploy to attract more business on a limited time basis—typically 12-16 months, the interest rates can and will reach soaring heights eventually. A balance transfer is a great idea if there are no other charges and the debt is cleared within the introductory time period. However, it is not a good idea to transfer balance just to avoid paying your credit card bills. Frequent transfers will reflect poorly on your credit report and lower your credit score.
A Personal Loan
A personal loan is basically an ideal situation loan that most people have in mind when considering debt consolidation. This type of loan has a reasonable monthly payment and a low-interest rate. Better still, if you get a personal loan with installments to be paid in a fixed time period, it will help you know exactly how long it is before all the debt is cleared instead of stretching out the debt for years by making the minimum payments only. Because of poor credit and payment history, it may be difficult to obtain such a personal loan so it is a good idea to study your credit report and know your credit score to help determine where you stand. No point in applying for a loan that you are not eligible for, but if it works for you, it will most certainly work very well.
Retirement Account Loan
Most retirement plans will allow you to borrow against them at a low-interest rate if you have one. It is very tempting as you will only be paying interest to your own account rather than a hounding lender but think long and hard before choosing to walk this path. The loan needs to be paid within 5 years time or you could be subjected to a penalty and income tax. If you consider quitting your job before you repay your loan, as the retirement loan or pension is due within 60 days of it, you could be penalized for early withdrawal. In the end, you could end up having to file for bankruptcy and jeopardizing your retirement at the same time. After careful consideration, credit counseling and only as a means of absolute last resort take a loan from your retirement funds.
While not the most perfect situation to be in, with a whole legion of creditors hypothetically lined up at your door, there are ways to pay off that debt, but make sure to weigh all the options available carefully. Know and understand the risks involved and then make a decision.
