The following article discuses debt consolidation since paying off debts that have got out of hand is not an easy matter. Credit card debt can be a particular problem because of the accumulating interest on the card. Spreading payments over several different cards means that you are paying several lots of interest. It’s easier if you can find a way of putting all of the debt together so that you only pay one lot of interest. Putting everything together as one debt is known as debt consolidation and there are a number of ways that this can be done.
Credit Card Debt Consolidation & Balance Transfers
If one of your cards has a much higher credit limit than the others then you can transfer the balance from the other cards onto the card with the most credit, providing you have enough credit left: consolidating the debts into one debt. Problems arise with this when people are then tempted to start spending on the other cards again. You also need to take care that you won’t be paying a higher rate of interest on the new card you are using to consolidate with.
Consolidation Using Your Home Equity
One way of consolidating your debt is to borrow against the equity in your home to pay off existing debt. There are two ways of doing this, either through a home equity loan for a stated amount that you repay over an agreed time or through a home equity credit line. The second option works in the same way as a credit card where you can borrow the money and then repay it. Although home equity has a much lower borrowing rate attached the danger is that you are taking unsecured credit card debt and securing it against your home. If you default on this line of credit then you could end up losing your home.
Debt Consolidation Loan
Debt consolidation loans are simply a way of combining all your debts and then paying them off through a single loan. You can get a debt consolidation loan from one of the major banks or from the newer debt consolidation companies. Debt consolidation companies may advertise lower interest rates on the loan but the loan often includes a consolidation fee that wipes out anything you might gain. Low interest bank loans are a much safer way of consolidating your debt.
Borrowing Against Your Retirement Fund
Most retirement plans enable you to borrow against your retirement savings but any loan has to be repaid within a certain time frame or you can be penalised and you may also incur tax. If your retirement fund is attached to your job and you leave the company then you will have to repay the loan within sixty days of leaving.
Borrowing Against Insurance
A life insurance loan, like a retirement fund loan should really be a last resort. Depending on the policy you should be able to borrow up to the cash value of your loan and the proceeds can then be used to consolidate your debt. If the loan is not repaid then it will be recovered from any death benefits and your family will lose out.
None of the ways of consolidating debt are ideal, all you are really doing is moving debt from one place to another and you could run into trouble. So you should think seriously before using a consolidation loan to pay off your debt.