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6 Methods for Consolidating Your Debt

Money Matters

Image of a newly remodeled kitchen.

Debt - it’s a sticky word. For most, it is a normal part of life. For others, it is to be avoided like a deadly disease. It can easily become the last thing anyone wants to talk about. However, tackling it early and correctly can save you from massive headaches.

It doesn’t matter how you got there--whether your debt is the result of overspending, income disparities, unemployment, or medical emergencies--if you have debt, you are not alone. On average, Nashville, Tennessee residents spend approximately $407 more than they bring in each year.

Fortunately, you don’t have to accept debt as a constant part of your life. There are options to eradicate it: debt consolidation or refinancing. The key is determining which choice meets your needs.

What is Debt Consolidation?

Let’s say you have debt in several forms: multiple credit cards, an auto loan, a personal loan, and medical bills. With bills and debts through various lenders and vendors, you are probably paying different interest rates at different times. This financial strategy, while rather commonplace, can make it seem impossible to maintain and track each and every required payment. And let’s not even mention the penalties you will face if you miss a payment, or worse, two or three. Through debt consolidation, you can combine all of your unsecured debts into a single bill, which you would pay off through one personal loan.

Debt consolidation helps you:

  • Centralize your debts and develop an organized payment plan

  • Earn potentially lower interest rates on your debts

  • Pay off your debt over time with consistent, manageable payments and fixed rates

Debt consolidation options include:

Secured vs. Unsecured Debt Consolidation Programs

Of the debt consolidation options listed above, there are many differences. The main feature that separates one option from another is whether the debt consolidation method is secured or unsecured.

With a secured loan, you are borrowing against an asset. This could be a home, car, or retirement fund. Lenders prefer secured loans because they are lower risk than unsecured loans, which don’t require the borrower to involve an asset. Unsecured loans tend to have higher interest rates than secured loans, but still lower rates than most credit cards.

1. Credit Card Debt Transfers

This type of debt consolidation method benefits those who currently have a large amount of debt on one credit card or many with high APRs. With approximately 30% of your FICO credit score dependent on your credit utilization ratio, it’s important to develop a strategy for transferring your balance prior to executing on an offer from any financial institution. When looking for the right credit card, strike a middle ground. You should find a card with a high enough balance and low enough APR to warrant consolidating your debt instead of continuing to pay off your current credit cards.

PROS:

  • Saves money on interest

  • Keep track of fewer payments

  • Doesn’t risk any assets

  • Faster to transfer balances than acquire a bank loan

CONS:

  • A cancelled credit card negatively impacts your credit score

2. Home Equity Line of Credit

Since a home equity line of credit is a secured loan, it typically offers lower rates, lower monthly payments, and longer repayment periods. A home equity line of credit gives you control over tackling your debt. You can choose from various options for the length of the draw and repayment periods, as well as how much money you actually take out on your home, which will be more than a standard personal or otherwise unsecured loan.

PROS:

  • Lower rates than unsecured loans

  • Larger loan amounts available

  • Longer repayment periods, lower monthly payments

CONS:

  • High risk option

  • Could potentially lose your home if you can’t keep up with the monthly payments

3. Auto Loans

Using an auto loan to consolidate your debt is a less common method than most. It’s most often applied when you have two or more car loans that could be easier to pay off if combined into one. Similar to credit card debt transfers, consolidating debt via auto loans could lower your APR and lead to an improved credit score.

PROS:

  • Makes money management simpler

  • Potential for lower APR

CONS:

  • Taking cash out on your car increases your total debt

  • Timeline extension on payments

  • Less lenders offer auto loans as debt consolidation solutions

4. Personal Loans

Compared to your average home equity loan, a personal loan has a cap. Based on your credit history, a lender will determine your loan amount. You’ll see higher interest rates than with secured loans, but, you’ll also carry less risk in terms of affecting your assets.

PROS:

  • With good credit, you can achieve a low interest rate

  • Quick and easy to get since it doesn’t require backing by an asset

CONS:

  • Watch for discrepancies in rates, terms, and fees

  • Higher rates than secured loans

5. Savings Accounts

In some cases, your current savings account might be the answer to eliminating your debt altogether. Accessing whatever funds you currently have in your savings account without having to take out a loan eliminates the need to have a financial representative involved. You simply use the money you already have and put it towards any outstanding debts. Make sure to only take out what you need to pay off your debt, and be sure to always keep an emergency fund on hand.

PROS:

  • Doesn’t require lender assistance

  • Easily accessible funds

CONS:

  • Depending on the health of your savings account, you could be tapping into your emergency funds

6. Debt Management Plans

With a debt management plan, you take a strategic and long-term approach to alleviating the impact of debt on your life. On a plan of this nature, you will have to close your credit card accounts, which will likely negatively impact your credit score short-term. But, if you can stick to the plan and lower your debt, a debt management plan might be a good option for solving your debt issues for the long haul.

You can work with nonprofit credit counseling agencies or even utilize your financial institution’s money management services to avoid taking out a loan, applying for a card, or tapping into your savings and retirement accounts. Representatives will negotiate with your creditors to create a plan for paying off your debt that every party agrees upon. Every month, you will make a payment to the agency or your institution and they will pay the creditors appropriately on your behalf. Only work with agencies and creditors that are certified through an establishment like the National Foundation for Credit Counseling, Financial Counseling Association of America, or Council on Accreditation.

PROS:

  • Long-term strategy to erase debt

  • Doesn’t require you to take out a loan, apply for a card, or dip into savings and investment accounts

  • Condenses debts into single monthly payments

CONS:

  • Could negatively impact your credit score in the short-term

Which method of debt consolidation is best for your situation? The experienced financial representatives at US Community Credit Union are here to help! Contact us today to review your options for conquering debt and living life free of financial worry.