BEST WAY TO CONSOLIDATE DEBT: Alternatives to Credit Card Debt Consolidations

Best Way To Consolidate Debt
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It is hard to pay off all of your credit card debt, particularly if you have several cards with large balances and/or a high-interest rate. Consolidating your debt may be the best option for you if you have trouble making your monthly card payments. Not only is there a debt consolidation calculator but also the best way to consolidate debt.

When you consolidate your debt, all of your obligations, including loan repayments and credit card bills, are rolled into a single monthly payment.

If you have a lot of loans or credit card accounts and want to streamline or lower your payments, it might be a great option.

Best Way to Consolidate Debt

After doing the calculations, decide on a debt consolidation strategy.

Each option has advantages and disadvantages, so as always, compare financial products to get the best rate and terms.

#1. Consider a Personal Loan

In contrast to a credit card, a personal loan has equal monthly payments and is an unsecured loan. Loan amounts can vary depending on credit history and score, but typically top out at $50,000.

Although banks and credit unions provide personal loans, subprime lenders are also very active in this market, so it’s crucial to compare shop and comprehends rates, terms, and fees.

Personal loans are good for debt consolidation because they’re unsecured and don’t risk assets. However, a large prime-rate loan requires good credit, and personal loan rates are higher than home equity loan rates.

#2. Tap Your Home Equity

The best debt consolidation strategy for you may be to use the equity in your home if you’re a responsible homeowner with good credit.

Compared to personal loans or credit cards, home equity loans typically have lower interest rates and larger loan amounts.

Longer repayment terms on home equity loans can cause lower monthly payments but higher interest costs overall. Home equity loans come in two flavors: a fixed-rate, lump-sum option and a HELOC, which functions like a credit card. Find out more about each choice and which might be the best for your circumstances.

Using home equity loans to pay off debt can be risky if you don’t use the money as intended and pay it back on time. You could lose your home if you don’t pay back the loan because you’re using it to consolidate unsecured debt. A HELOC has variable interest rates, which, if rates change over time, can add up.

Another disadvantage of the new tax law is that unless you use a home equity loan for significant home improvements that increase your property’s value, you can’t deduct the mortgage interest on it.

#3. Use a Credit Card Balance Transfer

You can reduce monthly payments and interest by consolidating debt on one credit card or credit card balance transfer.

A card with a high enough limit to carry your balances and a low, long-lasting APR is needed for consolidation.

A balance transfer credit card is often easier to get than a bank loan and puts no assets at risk. Ask about the fees and maximums for balance transfers before applying. Unless you are approved, you typically won’t find out the APR or credit limit until after.

It’s wise to exercise caution if this is your plan for debt consolidation because using one credit card as the repository for all of your card debt amounts to fighting fire with fire.

After consolidating your debts onto one card, concentrate on paying off that card as quickly as you can.

#4. Look to Savings or Retirement Accounts

Depending on your debt load and personal circumstances, using savings or retirement accounts as a debt consolidation option may be wise.

You might use the following account types as debt relief strategies:

Savings Account

If you borrow from your savings, you won’t have to worry about lost interest. There are conflicting demands on that money.

It’s risky to forego emergency funds to consolidate debt because you may need money for an unforeseen expense.

401 (k)

You can borrow money from many 401(k) plans at a low rate of interest, and you pay the interest. However, if you leave your job or are fired, the entire 401(k) loan is immediately due, and if you don’t pay it back and you’re under the age of 59.5, there is an additional 10% penalty. Note that if you leave your investments in the 401(k), you will lose any potential earnings.

Roth Individual Retirement Account

Although there are no fees associated with taking out money from your Roth IRA, make sure that consolidating your debts will outweigh the principal and compound interest you will lose.

#5. Explore a debt management plan

A debt management plan might be the best option for you if you’re looking for debt consolidation solutions that don’t involve taking out a loan, applying for a new card, or using your savings or retirement funds.

With a debt management plan, you’ll work with a nonprofit credit counseling organization to negotiate with creditors and create a pay-off plan.

You close all credit card accounts and give the organization one monthly payment, which is then distributed to the creditors.

However, you continue to receive all billing correspondence from your creditors, making it simple to monitor the rate of repayment of your debt.

You’ll get the best rates on debt consolidation loans (but not lower balances) if you follow the plan.

If you’re in need, some agencies might work for little or no money.

Stay with nonprofit organizations connected to the National Foundation for Credit Counseling or the Financial Counseling Association of America, and confirm that your debt counselor has a Council on Accreditation certification.

You won’t be able to use credit cards in an emergency since you will have to close all of your accounts while on a debt management plan. This will harm your credit rating. However, if you maintain payments and avoid more debt, a debt management plan may help your credit score over time.

Debt Consolidation Calculator

It is difficult to stay afloat when you’re swimming in debt.

The debt consolidation calculator helps you decide if it’s the best option for you. Enter the sums owed on your credit cards, loans, and other debts. Next, calculate the monthly payment for a consolidated loan.

Until you locate a debt consolidation strategy that matches your objectives and spending limit, try adjusting the terms, loan types, or rates.

Here is how to use the debt consolidation calculator:

Step 1: 

Enter the balances, interest rates, and monthly payments you currently make on your unsecured debts, such as credit cards, personal loans, and payday loans.

Secured debts like auto loans and low-interest student loans should not be included here. 

There are more effective ways to handle those debts (learn more about options for refinancing student and auto loans).

Click “I’m done,” then review the calculator’s output based on the numbers you provided:

  • Total balance: The total of all of your outstanding debts.
  • Combined interest rate: Your average weighted interest rate for each debt you entered into the calculator.
  • Total monthly payment: The total of your interest-plus-principal payments made toward these debts each month.
  • How long it will take you to become debt-free: This estimate is based on your current balance and monthly payments.

Step 2: 

To view your options for debt consolidation, including personal loans, select your credit score range.

You will see typical annual percentage rate ranges provided by lenders, as well as additional options for people with bad credit.

Lenders who provide direct payment to creditors send the loan proceeds to your creditors directly, streamlining the debt repayment process.

Enter a projected interest rate and the desired loan term (in years) for the new loan using the sliders below the table.

Step 3: 

Compare your existing debts with the terms of the new debt consolidation loan.

When your new total payment and interest savings outweigh your current total payment, consolidating your debt makes the most sense.

Conclusion

With the assistance of a debt consolidation calculator, you can consolidate your credit card debt and pay a single fixed interest rate rather than paying various interest rates from each creditor.

Besides providing relief from your credit card debt, these strategies also give you more financial control over the future and remove the temptation to use your credit card by doing away with the card itself.

However, you should carefully assess your credit card balances, interest rates, and monthly payment amounts before deciding to consolidate personal credit card debt.

Choose a plan that will allow you to save money while paying off your debt.

Best Way to Consolidate Debt FAQs

Can I consolidate all my debts into one payment?

Using a balance transfer card or a debt consolidation loan, you can combine all of your debts into a single payment

Do debt consolidation loans hurt my credit score?

Because lenders demand a hard credit pull, you might experience a brief decline in your credit scores after applying for a debt consolidation loan. If you make your payments on time and do not take on additional debt, your credit scores should improve.

What is the average interest rate on a debt consolidation loan?

Standard debt consolidation loan interest rates typically range from 6 to 36 percent. For rates at the lower end of that range, you need to have excellent credit.

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