If you have multiple outstanding debts on which you are paying high-interest rates, taking out a loan to consolidate your debts can help you repay your loan quickly and save money that you would have otherwise spent on interest payments. However, before you zero in on a particular debt consolidation loan, it’s important to know what the best options are.
Debt Consolidation Options
- Balance Transfer Card: If you are able to qualify for a balance transfer credit card that offers a 0% APR, or at least a very low-interest rate, for a promotional period, you can use it to repay your high-interest debts. Keep in mind that this involves balance transfer fees. Also, the promotional period does not usually last longer than 21 months.
- Home Equity Loan: If you have built up enough equity in your home, you can borrow against it to consolidate your debts. Since your loan is secured by your home, you will likely be able to qualify for a low rate of interest. That said, home equity loans are also risky. If you miss your payments, there’s a chance the lender could initiate foreclosure proceedings.
- Personal Loan: You can also take out a personal loan to consolidate your debt. If you have a good credit score and low debt-to-income ratio, there’s a good chance you may be offered a competitive interest rate. Although personal loans don’t require you to put up any collateral, any payment defaults could negatively affect your credit score.
- 401(k) Loan: Another way to consolidate your debts is with a 401(k) loan. Keep in mind not all plans will allow this. Also, if you keep borrowing money from your 401(k), it stops growing and doesn’t add to your retirement fund.
How To Avoid Debt Traps
Remember that debt consolidation can help make your debts more manageable. However, along with consolidating your debts, you should also make the necessary lifestyle changes to avoid racking up more debt. So, to start off, you may want to review your bank and credit card statements to identify where you tend to spend the most. Once this is done, it’s best to set a budget for yourself.
