Most Americans have some form of debt. For anyone struggling with debt, or simply wanting to organize debt, debt consolidation may be a good option. Debt consolidation is the process of transferring multiple smaller debts (usually accompanied by high interest rates) to a larger form of debt which is accompanied by lower interest rates. Before seeking out debt consolidation it may be help to know the ins-and-outs of the process along with the pros and cons of debt consolidation.
Who Should Seek Debt Consolidation?
Debt Consolidation generally works best for those who/whose:
- Have a Balanced Debt to Income Ratio-A good candidate for debt consolidation, will have debt that does not equal more than fifty percent of their household income.
- Already Have Good Financial Habits- Debt consolidation works best for those who already have a good grasp of their finances and debt- they just need a smarter way of paying it off.
- Can Get A Good Interest Rate – This is an important factor to pay attention to- as it is an essential part of debt consolidation. Finding a new, low interest loan or credit is key, and one may only get that with a good credit score.
How to Go About Debt Consolidation
There are primarily two ways to seek debt consolidation:
- Through A Credit Card
Many credit card lenders offer their customers a zero percentage interest rate for the first year or for a few months after the credit card account is first opened. For many people seeking debt consolidation, this is the perfect opportunity to transfer debt onto a new card and take advantage of paying it off with no interest attached.
Credit cards come with all kinds of amounts, interest rates, and perks. Before choosing the one to use for debt consolidation it is important to find a good balance between those three factors (for your individual financial needs).
- Through A Loan
For those who do not have the credentials for a new credit card they may want to consider taking out a loan for debt consolidation. Unlike credit cards, loans can be made available for a variety of financial histories. In addition, a person can take out a secured loan from the things they have such as a home, a car. Even a 401k loan works.
Before considering a loan for debt consolidation, it is important to look at; if the amount will cover all debt, the amount of interest that the loan carries, and what possible consequences there may be for borrowing.
No matter what route a person chooses to take to consolidate debt, it is important to look around at several credit card and loan lenders before deciding one to go with. Additionally it may be helpful to come up with a budget, allocating a certain amount to the new loan being taken on (to prevent from getting into even more debt).
The Pros and Cons of Debt Consolidation
Like many other things in the financial world- debt consolidation comes with its own sets of pros and cons. Pay attention and consider these before pursuing this form of debt organization:
Pros of Debt Consolidation
- Time Extensions– Can give a person more time to pay back debt.
- Lower Monthly Payments– Debt consolidation may lower the amount due each month.
- Can Help Eliminate Debt quickly- – Can help pay off debt faster- with little to no interest.
- Options– There are several ways to go about it.
Cons of Debt Consolidation
- Credit History Having an Impact– Not everyone may be able to get a good interest rate (It is dependent on credit history).
- Potential Loss– If a secure loan is taken out and not paid- a person may lose whatever they secured the loan with (usually a car or home)
- May Keep a Person in Debt– Debt Consolidation will not build good financial habits– and for those who don’t have them already have them, debt consolidation may actually work against them.
- Higher Cost– For some people extending the length of time to pay back debt, may end up costing them more in the long run.
Debt consolidation does work for many Americans. However, before thinking about debt consolidation carefully go over the pros and cons and seriously think about whether or not it would be a good option for you, and your individual financial situation.
Debt Consolidation is the process of organizing smaller, high interest debts into one single low interest form of debt. By doing this a person can extend the amount of time they have to pay back debt, lower the interest they are paying, and make managing debt a little bit easier. For those considering debt consolidation there are two primary ways to go about it: thorough a credit card or through a loan. Whatever route a person takes to pursue this process, it is important to find a lender that will offer a low interest rate and will work with their unique financial circumstances.
Picking from Debt Consolidate Options
Debt consolidation is the process of transferring smaller debts into one large form of debt. The transferred debt has a smaller amount of interest on it than the previous debts. The goal here to make debt more organized- and for some to get it paid off quicker. There are two major options to consider when thinking about debt consolidation; either through a credit card or through a loan. It may be confusing picking between those two debt consolidation options. However there are different factors that can narrow down that decision. Before even picking an option to consolidate debt it is important to first consider whether or not debt consolidation is right for you.
Who is Debt Consolidation Best For?
Debt consolidation generally works best for those who have/ want a combination of the following:
- Already have good financial habits (this is an important one)
- Have multiple smaller debts with high interest rates
- Want to deal with one payment for all debt
- Want more flexibility when paying back debt
- Want to lower the interest rate on their debt
- Have multiple debts that will take more than six months, to a year to pay off
So before thinking about debt consolidation, it is best to think about whether these conditions apply to you. If not then you may want to seek other ways to handle debt. The two ways to go towards debt consolidation are either taking out a loan or using a credit card to transfer the debt onto it. Here is a further breakdown for those two options:
Picking the Credit Card Option for Debt Consolidation
This option is also known as a balance transfer, and a person has a few options they can choose to pick a credit card from:
- A Bank– This is a good place to go if a person has good credit and want a thorough understanding of what their credit card does (as there are bankers that are there to help guide a customer and provide them with different options)
- A Credit Union– These are similar to banks but offer more flexibility to those who have poor credit- pay attention to interest rates here.
- A credit Card company- These offer the most convenience- as a person can apply for them online. When going for these, it is best to read to the details and to make sure that the interest rate that you are getting is low.
The best option here doesn’t really exist between these three lenders- it is just dependent on the needs of an individual and their credit score (as credit score may impact the interest of a loan).
Picking the Loan Option for Debt Consolidation
Picking the option of a loan offers a person more flexibility, this is simply because there are several types of loans that exist in the industry. The best loans for this purpose are ones with low interest rates, for those with poor credit- there are high interest loans that may work. However generally debt consolidation is recommended for those with good credit scores. Here are the common types of loans that may be good for debt consolidation:
A Personal Loan
A personal loan is one that is given out for multiple reasons. This loan can have some sort of collateral if the borrower and lender agree to do so. There are many financial institutions like, banks, and, credit unions that offer these types of loans. These may be a good option for debt consolidation because usually come with lower interest rates- even when compared to credit cards.
However not everyone may be eligible for these types of loans- as personal loan lenders factor in the amount of existing debt and- of course credit history.
A Home Equity Loan
In a home equity loan a house is put down as collateral- so it is a second mortgage. Because this type of loan is a secured loan, credit may not have a huge factor in determining eligibility. These types of loans can have very low interest rates and can be stretched out to about fifteen years of time to pay back the loan- making the monthly payments very affordable.
Before considering this type of loan it is important to think about the risk of your home that is involved (if the payments aren’t made) and, to think about whether that extended time will be financially beneficial or not.
A 401k/Retirement Loan
The most common type of retirement plan that Americans have is a 401k. When it comes to a retirement or 401k loan– a person borrows money directly from themselves. These loans can be very easy to be eligible for, and any interest paid will be back to yourself.
When looking at these loans it is important to understand that there may be tax penalties- and if a person leaves a company while taking out this loan they may have to pay back the full amount right away. So just pay attention to the details.
When looking at debt consolidation it may be a little confusing to pick between the options of a credit card or taking out a loan. Before choosing an option it is best to understand the different routes that these two methods of debt consolidation break into. From there, it becomes a little easier to see the routes that best fit an individual’s financial situation and goals.
How to Consolidate Debt on a Tight Budget
Consolidating your debt can be a great way to make paying off a sizeable amount of debt a great deal easier on you. However, if you have a tight budget, then it still might not be as easy. Luckily, there are still some ways you can go about consolidating your debt on a tight budget.
Tally Up What Debt You Owe
Before you consolidate your debt, get together all of the necessary paperwork and tally up each individual debt you have incurred to know the grand total amount of debt you have altogether.
Another easy way for you to find out the amount you owe altogether is by making a request for a copy of your credit report. Your credit report will have a comprehensive list of all debts that you have currently incurred.
Put Together a Solid Budget
Once you know how much money you owe altogether, the next thing you need to do is come up with a budget if you have not already. Understandably, it may end up being a rather tight one.
However, even on a tight budget, you can still manage to get your debt consolidated and then get all of your debt paid off. Just make sure that you stick to the budget as closely as you possibly can.
Find the Right Consolidation Program for You
An important part of consolidating your debt is to find the right consolidation program for you. There are various kinds of loans you can take out that will help you funnel all of your debts into one easy to manage payment.
Just make sure that whatever consolidation program you go with has your best interests at heart, as there are many that will not. Some may do whatever it takes to get as much money as they can out of you – which you definitely do not want if you are on a tight budget.
Formulate a Plan While on a Tight Budget
Once you have a solid budget put together and have found a good consolidation program, it is time to formulate a plan to get you out of debt. By having a plan of attack, you do not have to wander aimlessly in the dark and hope you eventually get to where you need to be.
A plan can lay out a set of steps you need to take and times you need to take them at. The further along down the path you get, the more accomplished you can feel.
Cut Down on Expenses
When on a tight budget, it is important that you cut expenses however you can. The following are ways you can leave more money in your pocket to help pay off your debt:
- Limit how often you eat out or get takeout
- Cancel your cable package
- Get a cheaper cell phone plan
- Cancel magazine subscriptions
- Buy food in bulk or that’s on sale
- Cancel gym memberships
- Cancel weekly lessons of any kind (if they are not school related)
- Clip coupons
Increase Your Income
One of the best things you can do if you are working with a rather tight budget when consolidating your debt is to increase the amount of money that you have to work with. By increasing your income, you can alleviate a great deal of financial stress.
Ways you can do this include:
- Getting a second part-time job
- Become a ride share driver for services like Uber or Lyft
- Sell some items you do not need
- Start a small home-based business with skills and resources you have
- Do online surveys
- Work for odd jobs through Fiverr or TaskRabbit
- Bring in metal to recycling centers
Do NOT Make New Debt
When working with a tight budget and consolidating your debt, one of the last things you want to do is make even more debt for yourself. This will just bury you deeper and make things even more complicated for you.
One of the best things you can do is to avoid using credit cards. These little things are one of the biggest culprits with getting people into further debt.
Always Pay on Time
Diligence with paying back your debt is key when consolidating. You do not want to miss a payment, as this can cause a rate increase or extra fees. Paying on time might not always be the easiest thing to do, but it will heavily benefit you in the long-run.