If you have a number of unpaid debts, you may want to consider debt consolidation. Debt consolidation, like the name suggests, helps you consolidate your debts such that instead of making multiple loan payments every month, you are making only one payment. Debt consolidation typically works only if you are able to find a loan that offers you enough funds to cover your debts at a competitive interest rate, helping you save money over time.
Common methods to consolidate debt
- Home equity loan: This type of loan allows you to borrow against the equity in your home. The interest for home equity loans is a lot lower than other types of loans since your home is used as collateral.
- Personal loan: Personal loans have a fixed interest rate and allow you to repay the borrowed amount over a period of time in monthly installments.
- Balance transfer credit card: You can also consolidate your debts with a balance transfer card that offers a promotional interest rate of 0% during the introductory period, which can last up to 21 months. You should aim to repay your debt within this interest-free period.
Things to keep in mind
- Your debt burden is not lifted: Consolidating your debts doesn’t mean your debts cease to exist. You still owe the same amount, except that the payments are consolidated.
- Keep the prepayment charges in mind: Before consolidating your debts, make sure to check whether your existing debts have any prepayment charges since this can increase the cost of the loan.
- Your credit score matters: Debt consolidation is a good option if you can get a new loan or balance transfer credit card at a competitive interest rate. So, ensure that you have an excellent credit score before you apply for debt consolidation.
Although debt consolidation may seem like a good option if you are battling several high-interest debts, it’s important to watch out for scams. All too often, debt consolidation companies push you into taking a high-interest loan that will work out to be a lot more expensive than your existing debts. So, ensure that you compare the different options and check the reputation of the creditor before signing up for the loan.