One of the ways of handling debts from different accounts is through debt consolidation. You can consolidate debt by combining your debt payments into one account. This will enable you to pay off your debt quicker. It has its advantages and disadvantages depending on the way you decide to go about it. Check out the five different ways to consolidate debt on your own;
1. Credit Card Balance Transfer | Ways To Consolidate Debt On Your Own
A low credit limit doesn’t have to stop you from doing a balance transfer. If you’re using a credit card with a high-interest rate, moving your balance to lower interest card can help you pay your debts faster. Before you consolidate debt with a balance transfer, make sure you’ll actually be saving money with the transfer.
2. Home Equity Loan | Ways To Consolidate Debt On Your Own
You can get a home equity loan and use it to consolidate your debt. A home equity loan is a close-ended account that’s repaid over a period of time. Home equity loans and credit lines often have lower interest rates and higher borrowing limits than other types of loans. However, there is a drawback. You’re securing your credit card debt with the equity in your home. If you fall behind on your payments, you face foreclosure, which is much worse than defaulting on your credit card payments.
3. Debt Consolidation Loan
Debt consolidation loans are used solely to combine all your debts. These loans may be offered by major banks or from non-profit debt consolidation companies. Be careful about using debt consolidation companies to consolidate debt. These loans often include extra fees, making the cost of the loan much higher. Avoid borrowing money from one of these companies. Instead, seek out a low-interest rate loan from your bank or credit union for better terms.
4. Borrow a Life Insurance Policy
Borrowing a life insurance policy may not be the best way out but it can save you from bankruptcy. You can typically borrow up to the cash value of your loan and use the proceeds to consolidate debt. Your insurance company won’t require you to make payments as long as the loan is less than the cash value of the policy, but it’s a good idea to make payments anyway. If you don’t repay the loan, then the death benefit will be used to cover what you borrowed and your survivors may not get anything at all.
5. Borrow From Retirement
This is another last resort method you can use to consolidate debt. Most retirement plans allow you to borrow against them, but there are some drawbacks to consolidating with a 401k loan. For starters, the loan has to be repaid in five years or it will be considered an early withdrawal and will be subject to a penalty and income tax. Not only that, if you leave your job the loan will be due within 60 days or you’ll face early withdrawal penalties. Think long and hard before borrowing from your retirement.
Drawbacks Of Consolidating Debt
All these options aren’t ideal, particularly life insurance and retirement fund loans, but you should know they exist. Before you consolidate debt, weigh all the options available to you. Understand the risks associated with your debt consolidation method. Finally, make sure you repay the loans you take out to consolidate debt.