Nowadays, almost every North American has some balance due for credit cards and loans at any given time. Thus, finding unique and valuable strategies to repay debt has become essential. One such creative strategy is debt consolidation. With this process, you can easily organize all your accounts in one place and then benefit from a single interest payment each month, which is comparatively lower than the individual loans.
So what is the easiest way to consolidate debt? There is no definite answer to this question as it varies depending upon the individual, their financial circumstances and their preferences. To get help regarding debt consolidation, you can visit this website.
Debt consolidation
You can use debt consolidation loan funds to repay old balances and high-interest debt. If you have several loans, make sure you repay the one with the highest interest rate first. This will reduce your overall interest cost. You then need to vigilantly pay off the new debt consolidation loan. So in simple words, you are consolidating two or more existing loans into one principal loan.
How to avoid debt?
Let us discuss some preventive measures to avoid debt accumulation:
- You have to select a budget plan to prevent overspending
- Maintain an emergency fund
- You have to stick to a strict saving routine, or you can invest in retirement or emergency funds
- Increase your credit score
- Only take a loan when it is essential.
- Pay your monthly instalments and credit card bills on time
Will consolidating debt hurt your credit score?
Debt consolidation can temporarily impact your credit score as you open a new credit line and transfer a huge amount. This is because the average age of all your accounts decreases when you take out a new loan and close out all the old accounts. A decrease in account age leads to a decreasing credit score.
Additionally, a new credit enquiry about consolidating your debt can temporarily affect your credit score.
How can debt consolidation affect your credit?
Closed loan accounts may affect your score
The average age of your accounts makes up about 15% of your credit score. So if you immediately close any old accounts after debt consolidation, it can reduce the average age of your accounts.
Hard inquiry
The lender will perform a credit check on you for a new loan or debt consolidation loan. Therefore with a hard inquiry, your credit score temporarily decreases by 10 points for one year.
Different ways for debt consolidation
You can adopt multiple approaches to consolidate your debt or leftover balance. Let us discuss some of the popular options.
Personal loan
Even though this is not recommended, you can apply for a personal loan from a credit union, bank or an online money lender. A personal loan is only beneficial if you have a good credit score and you’re able to get a lower interest. However, if you have poor credit, a personal loan is not worth the trouble.
A personal loan will simplify your debt consolidation process. You will only be paying one instalment per month to a single lender. Your credit score will slowly improve if you pay monthly instalments.
Ask for help from family or friends
If you believe that a friend or a family member can help you with your financial situation, you may contact them.
However, make sure that you agree on a repayment schedule and a set of repayment terms. A benefit is that you do not have to meet any minimum eligibility rates, and you may decide upon a favourable interest rate which will be suitable for you.
Apply for a home equity loan
In a home equity loan or HELOC, the homeowner borrows some amount against the home equity. Usually, the interest rates are comparatively lower than a personal loan, as you will use your house as collateral.
Home equity loans will allow you to make fixed monthly payments. So if your home has accumulated enough equity and you meet all the other standards laid out by the lender, you can get a credit line or home loan. Now you can transfer all your debt or leftover balance to your home loan, which you can repay in monthly instalments.
However, since your loan is secured by your home, you run the risk of losing your property in case you make significantly extended defaults. Thus, make sure that you are not complacent with repayments.
Retirement account loans
You can also borrow money from your employer-sponsored retirement plan like a 401 (k) loan. Keep the following things in mind before applying for a loan:
- You will not be allowed to borrow more than 50% of the amount from your retirement account
- You will get a maximum of 5 years to repay the loan. If you default, you may need to pay tax penalties or early withdrawal penalties.
- You need to repay the loan within a maximum of 2 months if you leave the job or pay early withdrawal charges.
Note: This is your retirement fund, so if you default or fail to repay, you can end up losing a retirement fund. However, even if you repay the amount in time, you will miss out on the compounding benefits.
Debt consolidation loan
Many banks, online money lenders and credit unions offer specific loans uniquely designed to help customers deal with their debt. These loans are available at all lower interest rates.
Banks and financial institutions are one of the most accessible sources for unsecured loans, but they are pretty selective about the borrowers they approve. Only customers with the best credit scores get the lowest interest rates.
- Credit unions offer better interest rates than banks
- Online money lenders will approve your loan within a couple of days, even with low credit scores. However, the interest rate can be higher.
- Another choice would be to contact storefront lenders or debt consultation companies. However, you may need to pay some extra fees.
Endnote
Debt consolidation is a major financial decision. Therefore you should not take any measure without consulting a financial expert. You can get in touch with a credit counsellor for advice or take help from an expert working in credit unions. These experts can help you create a debt management plan, and therefore you can slowly eliminate all your leftover balance or debt.
