The Ultimate Debt Consolidation Guide 2022

Advertisement

Debt Consolidation by definition is the process of taking out a single loan to pay off multiple debts.

If you’re in debt and would like to find a way out, debt consolidation is something you may want to consider.

When most people first hear the term debt consolidation, they may think ‘higher-balance credit card with a low introductory rate or low transfer fees’… and those people are right… to an extent.

That’s not the only, or even best, way to consolidate your debt.  You may be in a position for a much better debt consolidation opportunity and not even realize it!

Debt-Consolidation

Below I go over the different types of debt consolidation methods and cover some facts about each.

What Exactly Is Debt Consolidation?

Debt consolidation is the act of combining all of your loans into one loan.  It’s as simple as that.  The ultimate goal with debt consolidation should be to lower your overall monthly payment.  Ideally, you would reduce your overall interest rate as well.

Does Debt Consolidation Mean Lower Interest Rate? 

Not necessarily.  This will all depend on the method you choose to consolidate your debt which I’ll go over shortly.  Some methods will lower your interest rate while others may increase your rate while extending the repayment terms.

With an extended repayment term, your overall monthly payment should decrease, therefore, making your monthly payment easier to manage.

Does Debt Consolidation Lower Your Credit Score? 

It depends.  If you currently make your monthly payments on time, then consolidating all of your debt into one may temporarily lower your score.

But rest assured, with timely payments your credit score will soon increase.

If you are currently struggling to make your debt payments on time, then a debt consolidation loan will help improve your score in the long run.  That’s if you make your payments on time, and if you are in the USA then this Loan Apps will help you get money easily.

There are a lot of factors that go into your credit score which are discussed in detail here: 8 Ways To Rebuild Your Credit. 

How Do I Know If A Debt Consolidation Loan Is Right For Me? 

  1. Are you struggling to maintain your monthly payments?
  2. Can you only afford to pay the minimum payment each month?
  3. Is most of your paycheck going towards your monthly debt payments?
  4. Are you unable to save money monthly due to overwhelming debt payments?
  5. Would you rather have more disposable income that you can use for investments, vacations, or other things you could spend your money on rather than higher interest – high payment debts?

If you answered yes to one or more of the questions above then a debt consolidation loan may be a good option for you.

What Are The Different Types of Debt Consolidation Loans?

There are many types of ways to consolidate your debt.  Below I will go over some of the most popular methods.

Balance Transfer

Pay-Off-Debt-Fast
Pay-Off-Debt-Fast

A balance transfer is the act of transferring your current credit card(s) to another credit card.

This can make sense if the new credit card has a high enough of a limit to cover all of your debt.  You also want to make sure that the new credit card has a lower interest rate than your current one(s).  Preferably a zero-interest credit card.

Another thing to keep in mind is the balance transfer promotion will usually end after a given time period.  So take that into account prior to transferring your debt.  The longer the promotional period, the better.

The interest rate tends to skyrocket after the promotional period ends.  If you go this route you want to make sure you can pay it off within the promotional time frame.

Otherwise, this option will not make much sense unless you plan to transfer your balance again to another creditor before the promotional offer expires.

401K Loan

401k Loan
401k Loan

A 401K loan is basically borrowing money against your 401K balance.

Advertisement

Every 401K holder comes with its own set of rules but generally speaking, you can borrow up to 50% of the total vested balance.

This isn’t the most ideal option since it does hinder your ability to earn interest on the funds you withdraw but can be a good option if you have a lot of high-interest credit cards and loans.

I would only recommend looking at this option as a last resort.  If your current interest rates are very high and you are disciplined enough to repay the loan then this can work out great.

If not, then I would look at alternate options.

Student Consolidation Loans

Student Loan Debt Written Out
Student Loan Debt Written Out

If student loans are where your struggles are, student consolidation loans may work best for you.  This basically works by combining all of your student loans into one loan with new repayment terms and rates.

The key here is to make sure the combined interest rate is less than what you are currently paying.  You also want to make sure that your total monthly payment will be reduced as well.

Debt Consolidation Loan

Debt Consolidation Loan Approved Written Out
Debt Consolidation Loan Approved Written Out

A Debt Consolidation loan allows you to combine all of your debts into one loan.  The interest rate you receive will vary depending on the company/insurance company you go through and on your credit score.

While this is a great option, it’s not recommended for those with poor credit.  So if you have good credit and would like to combine your loans into one, I would recommend looking into this.

LightStream offers a great Debt Consolidation program with extremely competitive rates.  Their loans range from $5,000 to $100,000 and their application process is simple.

Home Equity Line Of Credit (HELOC) 

HELOC written out Debt
HELOC written out Debt

A HELOC is an option for homeowners that have equity in their homes.  It allows you to take out equity from your home through a home equity line of credit.

Those funds can then be used to pay off all of your debt leaving you with only one payment.

You will need to look at all the terms to see if this will make sense to you.  The only thing I dislike about a HELOC is the interest rate can fluctuate.

With a fluctuation in interest rate comes a fluctuation in payments as well.

Bank of England Mortgage is a US-based mortgage company that offers this service.

Cash-Out Refinance

Cash Out Refinance Typed Out

A cash-out refinance is another option for homeowners and probably one of my favorite options.  This option will also require you to have equity in your home to pay off your debt.

A cash-out refinance basically works by refinancing your current mortgage while taking cash out from the equity.  That equity can then be used to pay off your debt.

So ultimately you lower your overall debt interest rate while extending your payment terms which can drastically lower your overall monthly obligations.

Bank of England Mortgage is also an excellent resource for this service anywhere in the US.  Working with a knowledgeable Certified Mortgage Advisor could save you thousands of dollars.

Knowing which method to choose will depend on your particular situation and your goals. If your main issue is credit card debt and you would like to pay it off on your own,  check out my article on How To Pay Off Credit Card Debt.

Make sure to sign up to get weekly actionable info on personal finance, savings, budgeting, and more.

Advertisement

Leave a Comment