Americans face a lot of consumer debt. In fact, the average American faces an average of $52,000 in debt. That’s a lot of money each month going to your debt payments.
The problem, though, is that for most people, their debt is spread across multiple accounts and balances. And these different accounts have varying interest rates.
Aside from high rates, managing multiple payments is tricky and can lead to late payments. That’s why it’s important to consolidate debt.
You can simplify your debt payback plan by combining your account balances into one. Instead of making ten payments, you can just make one every month.
Wondering what are the best ways to consolidate debt? Keep reading to discover how to make your financial situation easier to manage.
What Is Debt Consolidation?
Consolidating debt is often the first step when creating a debt management plan. Few things are as powerful when it comes to personal finance.
Most people have different types of loans, ranging from credit card debt to auto loans, to personal loans, to medical loans, and so forth. But there are ways you can consolidate all of your debt into one loan, with one interest rate, and one monthly payment.
The process of doing this often results in one new loan that pays back every other loan. You still owe the same amount, but you are simplifying the process to make your life much easier.
Why Debt Consolidation Is So Important
When you have too many monthly payments to make each month, it’s very easy to forget one or two. This can result in a missed or late payment.
Not only will these incur late fees, wasting even more money, but they can affect your credit score. Late or missing payments are one of the biggest negative factors on your credit score.
These marks can last for years and do tons of damage to your score. With a bad credit score, you are limiting your borrowing options for the future. So if you plan to get a mortgage, an auto loan, or a student loan in the future, late payments will make it much more difficult for you.
On top of that, your different types of loans will have different interest rates. Since most people have around four different credit cards, that’s four loans with crazy high-interest rates.
It’s hard to ever manage your financial situation when you are paying back loans with 15% or higher interest rates. Debt consolidation gives you the opportunity to pay off these high rate credit card loans, replacing them with one, lower-rate loan, saving you tons of money each month.
And lastly, consolidating all of your loans into one will radically lower your stress levels. It can be overwhelming to feel like you have so many things to pay off. Even though consolidating debt won’t lower the amount you owe, having only one payment frees up a lot of mental space.
It will work wonders to free you from stress and worry, helping you feel confident that you can actually pay off your debt and live free.
Ways to Consolidate Debt
Now that you know how powerful debt consolidation is, it’s time to get started. Here are some of the best ways you can consolidate debt today.
Debt Consolidation Loan
One of the best ways to consolidate debt is to get a consolidation loan. These were created superficially for this purpose.
Lenders like Plenti make it as easy as possible to apply for the debt consolidation loan you need. Rates can start as low as 6% and you can set a term length that works for your monthly budget, between 1 and 7 years.
When you get a debt consolidation loan, you’ll receive the lump sum you need to go and pay back each individual loan. Then, you’ll begin making monthly or weekly payments.
If you can shop around for an interest rate and payback term that works for you, this is often the best way to consolidate debt, saving money. Just be aware that some lenders will charge upfront or ongoing fees.
More often than not, these fees are worth it, as they will save you money over the life of your loan by lowering your overall interest rates.
Debt consolidation loans are essentially personal loans but have a fancier name. If you have a preferred lender you want to work with, such as your current bank, you could just get a personal loan as well.
These function in much the same way as debt consolidation loans. You’ll shop around for loans that provide you with the amount you need, at an acceptable interest rate based on your credit score and set a term length that works for your budget.
You’ll receive the lump sum once approved, pay back your other loans, and begin making payments on your single personal loan. The benefit of this is that you can often use your current bank, keeping your financial management under one roof. And you may qualify for a better rate since you are already a customer.
Balance Transfer Credit Card
If you are only looking to consolidate credit cards, you could opt for a balance transfer credit card. These are separate, new credit cards that you would apply for just like any other credit card.
But each one is different. Some offer interest-free payments for a few months, or up to a year. Some will charge a balance transfer fee, though some may waive this charge.
Rates will typically be higher than personal loans, but often lower than standard credit card rates. If you can qualify for a card with 0% APR for 12 to 18 months, with no annual fee, you could potentially save hundreds of dollars paying off your credit card debt interest-free.
Most cards will allow you to transfer balances from any bank or card issuer. Some cards, however, only with other cards issued by the same bank.
Using Home Equity
Tapping into your home’s equity is another option when it comes to consolidating debt. You can do this by either getting a home equity line of credit (HELOC) or a home equity loan.
Both will enjoy low-interest rates, as the loans are secured against your home. If you are confident in your ability to pay back these loans, it’s probably the lowest interest rate you can get.
However, using your home’s equity can be risky. If you fail to make payments, you could risk losing your home. Only go the equity route if you are confident in your monthly income and ability to make your payments.
A home equity line of credit essentially acts as a credit card, with a revolving loan balance. They are more flexible, and you only need to pay back what you use.
A home equity loan, on the other hand, is similar to a personal loan in that you will receive a lump sum upfront and begin making payments right away. These are less flexible but just as powerful.
Refinancing Your Home
Your last option is to refinance your home altogether. If you have enough equity to qualify for a home equity loan, you have enough to refinance.
Refinancing is the process of getting a new mortgage to replace your old mortgage. When doing so to consolidate debt, you would perform a cash-out refinance. That is, you’ll be cashing out some of your equity, increasing your new loan mortgage balance.
The benefit of doing so is that mortgage rates can often be a low as two or three percent. That is much, much lower than the average credit card rate that hovers around 17 percent.
Of course, refinancing is an expensive process. You’ll need to pay closing costs, which can be a few thousand dollars. You are all resetting your mortgage clock, usually with a new 30-year loan.
It can be an effective strategy, but make sure to consider all other options. Only do this when you get a new mortgage rate that is lower than your current rate, which can help you save thousands over the life of your mortgage.
Tips for Getting Out of Debt
So you’ve consolidated your debt into one loan, one payment, and one interest rate. Now what?
Now it’s time to turbocharge your ability to pay it back. Hopefully, the loan option you chose doesn’t have an early payoff penalty, because your goal should be to pay it off as quickly as possible.
There are many ways to make this a reality, which can be done through a combination of cutting expenses and increasing your income. You can pay less in gas each month by walking or riding your bike when traveling to nearby stores, parks, or workplaces.
You can cut out the weekly restaurant and coffee shop bills by learning how to cook and make good coffee at home. You can take some time to make your home more energy-efficient, lowering your monthly utility bills.
On the income side, you could consider spending an hour or two each day working in the gig economy. You can drive for a rideshare service or deliver food and groceries, for example. If you can make an extra $30 per day, putting it all towards your debt, you’ll shave years off your loan, getting free much faster.
Getting Closer to Being Debt-Free
Now that you know how to consolidate debt, it’s time to take the first step. Add up all your loan balances to figure out how much you need to borrow, and start shopping around for the best loan option for you. Once you get this taken care of, you will officially be on the path to being debt-free and living the life you actually want.