NerdWallet’s 2016 Debt Survey shows that Americans have only increased their total debt in the last decade, with the average household’s credit card debt at $16,061 and their total average debt, including mortgages, at a staggering $132,529! This increase in debt also means an increase in ways to consolidate that debt. Consolidating debt can help a household pay off the debt faster, save money, and keep track of payments to avoid late fees. The best way to consolidate debt differs for every household’s unique situation, so read on to learn more about what options exist and which option would be most beneficial for you.
Pros: Desirable introductory interest rates, some institutions don’t charge fees for a transfer
Cons: Introductory rate will expire, your credit report will still show that you carry a large balance of revolving debt
Many people are unaware of using a home loan to consolidate debt, but it is actually one of the best ways to tackle debt consolidation if you’re a homeowner. Home loans usually have extremely low interest rates compared to other debt consolidation tools, and can actually improve your credit score by diversifying your credit and removing your debt from undesirable locations like credit cards. Both the loan and line of credit let you borrow against the equity in your home, but a loan is closed-ended with a specific loan amount and payoff period, whereas the line of credit can be kept open to utilize again once you pay down the current amount.
Pros: Low interest rates, can help your credit score, tax-deductible interest
Cons: If you don’t pay – your house could be foreclosed upon, must be a home-owner to take advantage
This is another type of installment loan that can offer favorable interest rates that will stay the same until you pay off the loan. Your rate will be dependent on your credit score, but these types of loans are simple to apply for and typically the approval process is quick.
Pros: Can help your credit score by diversifying debt, quick approval, rate is fixed for the life of the loan
Cons: Your rate is determined by your credit score, you must watch out for predatory lenders in this market
There are plenty of companies out there that advertise comprehensive debt solution strategies. They take on all of your debt and then you work directly with them to pay it off. There are some reputable companies, but some companies are considered predatory and try to take advantage of their customers. Be careful and do your research!
Another approach is to utilize your local financial institution. Most credit unions would be happy to develop a customized plan to help consolidate your debt and reach your financial goals. For example, AmeriChoice offers a free Personal Financial Analysis by our experts. After the analysis, we recommend a debt restructuring plan to pay off your debt and work to build up your savings.
You may have the opportunity to borrow against your life insurance policy. If the loan is less than the cash value of the policy, you typically won’t have make repayments. However, if you don’t, then you lose the full value of the policy when you need it most. If you pass away, the amount you borrowed will be covered by your policy, with possibly nothing left over for your family.
You also have the option to borrow from yourself by taking money out of your 401K. However, if you’re not able to repay that amount within an allotted period of time, usually five years, it will be considered an early withdrawal and you will face income taxes and penalties. Plus, if for any reason you must leave your current job, the amount would be due within only 60 days or be subject to early withdrawal penalties.