There are so many ways that people accumulate debt. It is easy for debt to climb into the thousands from taking out personal loans, mortgages, and misusing credit cards. Not all debt is bad; however, high-interest debt can lead to a downward spiral. An excellent way to control high-interest debt is consolidation.
As a strategy, consolidation brings all debt together for ease of manageability. In addition, consolidated debts often have lower interest rates, making monthly payments easier to pay off. Here are five excellent tips that can help you consolidate your high-interest debt.
Explore Homeowner Loans
Homeowner loans typically have the lowest interest rates of various loans on the market, between 4% and 7%. In addition, they offer the most extended repayment periods, which can make monthly payments highly affordable.
These loans focus on the home’s equity, which is calculated as the house’s current value, less the amount that is owed from the original home loan. The balance is the amount that is available for borrowing. The funds borrowed can then be used to offset other high-interest debts.
It is important to note that the terms of the loan may be affected by your credit score, as well as a debt-income ratio.
Balance Transfer Credit Cards
This is an excellent option for consolidating debt if you can create a plan and follow through. The balance transfer card needs to have a credit limit that is high enough to absorb all of your outstanding debt. In addition, the interest payable on this card needs to be low enough to add value.
Balance transfer cards often give the users an introductory period where the interest rate is very low. In some cases, for this period, there is zero interest. The user should capitalize on this period and pay all the outstanding debt.
This way, with the expiry of the introductory period, there is no risk of accumulation of new debt. This debt consolidation option is ideal for anyone seeking a quick solution. It takes less time to get approved than a loan and does not require any collateral.
Take Out a Personal Loan
A personal loan is an excellent option if you have a clear plan for debt repayment. It works by ensuring all your debt balances are put into one loan. The key is to make sure that you have a monthly payment that you can afford without struggle. Furthermore, it is the ideal option if you are determined to avoid any debt in the future.
Consider the duration of time that you need to pay off the debt. If you are looking at six months, the drop in interest may not make a significant difference. However, if you can spread the payment over five years, then the gains of taking a personal loan make more sense.
The best terms are made available for individuals with a good credit score. With a good credit score, you could benefit from a single digit interest rate.
Choose a Debt Management Plan
Sometimes when in debt, the last thing you want to do is explore more debt like homeowner loans to resolve your financial issues. Instead, you may choose to go with a debt management plan in this instance.
With this type of plan, you partner with a credit counselling agency. This agency takes on the role of negotiator and interacts with creditors on your behalf. A draft payoff plan is put in place with the credit agency taking control.
All the outstanding debt accounts are closed, and every month, a payment is made to the agency. The agency then makes payments to the relevant creditors. With this option, negotiations are made for the best loan rates, and penalty fees are under control. Another advantage is that your credit score can significantly improve in the long term.
Consider Peer to Peer Loans
There are platforms available online that make it possible to get funds from individual investors. These are typically unsecured, and it is easier to negotiate terms. The lender will take into consideration the credit history of the borrower. This history determines the terms of the loan and interest rates, fees, and limits.
Ideally, borrowers who have a higher credit score enjoy the benefits of having a lower interest rate. The funds borrowed can be used to offset high-interest debts so that only one manageable payment is necessary.
The best course of action would be to avoid debt altogether. However, this may not always be viable. Consolidating your debt should help you find your feet again financially. After a period of debt consolidation, it is essential to create a plan that will keep you away from debt in the future.
This requires being careful about lenders and paying close attention to their interest rates. Seek out solutions that have flexible terms so that you can negotiate when you need time to get through hard times. Avoid lenders who are illegitimate and focus on getting funds from the right institutions.
Of all these options to consolidate high-interest debt, homeowner loans offer the most favourable terms. Furthermore, they make financial planning easy as the interest rates are fixed. This means that the monthly payments are fixed as well for the duration of the loan. Additionally, the interest can be tax deductible.