Consolidate Debt
Your goal in consolidating debt should be to lower your overall costs. To accomplish this there are a few things you should focus on:
- Reduce the total amount of interest you are currently paying on your outstanding debt
- Reduce the total amount of your monthly payments that go to paying off debt
- Have a plan
Your choice has to be based upon your own personal financial situation. As you investigate your options, look at the final numbers. Is your new loan going to cost you more in the long run? Before you make a decision, ask yourself a few questions:
- Once you pay off all of your debts, can you avoid getting back into debt again?
- Is the rate you will be charged on a new loan or balance transfer offer likely to change over time? If so, will you end up paying more than you are now?
- Will you incur any additional fees, charges, or penalties if you pay your current balances off early?
If so, you may want to keep your existing loans, even if payments are higher.
Determining the merits of various loan programs requires some lengthy number crunching. If this is not your strength, enlist the help of a skilled financial advisor.
Here are some of the most common ways to consolidate debt:
Take advantage of credit card balance transfer rates
Consider transferring credit card balances to one card. Check the maximums on your cards, and choose one with a low Annual Percentage Rate (APR). Make sure the APR is not higher for balance transfers. The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. Call your current issuer to ask what interest rates/APR they will offer you if you transfer balances from other cards over to theirs.
But be careful - too many applications for credit in a short period of time can hurt your credit rating. Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3 to 5 years.
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Use your home equity
If you are a home owner, several options may be available to you
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generally at lower rates than credit cards or personal loans
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with the added advantage of possibly having the payments become tax-deductible (talk to your tax advisor for details).
The most common options include home refinance and home equity loans or lines of credit. With a home equity loan, you borrow against the value of you home, minus any other mortgages.
There are two major types of home equity loans:
- A home equity loan provides a fixed amount of money for a fixed period of time.
- A home equity line of credit allows you to borrow up to a pre-approved credit limit (interest rates are usually variable) and can borrow again as you pay down what you’ve used.
These loans can offer attractive rates, and the interest may be tax-deductible if you itemize (talk to your tax advisor). Many issuers offer no or low closing costs for these loans. Use this option with care as you will end up with less equity in your home, which will take time to earn back.
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Refinancing your home
You may also want to consider refinancing your original mortgage. Refinancing your home and taking out money to pay off bills (called "cash-out refinance") is yet another way to tap the equity in your home. If you can refinance at a substantially lower interest rate, you'll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now if rates are low. Make sure you understand the total cost of refinancing. Be aware of how much (if any) equity will be left in your home. Will this thwart your plans for the future? Take any money you've freed up by paying off other bills and use that to create an emergency savings fund.
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