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.