Most people don’t have the luxury of paying for many of life’s necessities in cash. Whether it is a home in which to live or a reliable car in which to get around and all the maintenance expenses that go with both, these days many find themselves in an increasing amount of debt. Debit has become a common financial state for many trying to establish a decent way of life.
But what do you do when the debit gets out of hand?
Depending on your situation and your amount of debt, it may not be enough just to reduce your expenses. This is especially the case if you find bills falling through the cracks because you have so many. You may need to simplify the repayment of your debt as well. This is where debt consolidation comes in. To get a handle on your debt you might consider the following debt consolidation options:
- Credit card balance transfers
- Mortgage refinance
- Home equity line of credit (HELOC) or home equity loan
- Debt consolidation or personal loan
Each of these options are a viable choice depending on your personal situation and the current economic climate. Let’s look at each.
Credit card balance transfers are an excellent way to consolidate high interest debt by tapping unused credit card balances at a lower annual percentage rate or APR. However, the repayment period is usually under 18 months and you will pay a transaction fee in the form of a percentage of the debt being transferred. If you don’t pay it off during the allotted time period, your transfer balance will convert to purchases and accrue interest at the higher rate for purchases.
Refinancing your home loan and taking cash out is a lovely idea but maybe you’re not in love with extending your loan term or accelerating it to the tune of a higher mortgage payment. Perhaps you don’t plan to stay in the home long enough to make it worth your while, or maybe the new APR isn’t very attractive. Lastly, maybe you don’t have enough equity in your home to get the amount of cash you need. These are important considerations to address before refinancing your home. However, if you have the equity and you plan on staying in your home a while, refinancing your debt using the equity in your home will reduce the interest and the number of bills you have to pay each month.
As mentioned earlier, provided you have enough equity in your home, maybe a HELOC or a home equity loan might be a better option since they don’t change the terms of your current mortgage and still provide a lump sum of cash to consolidate your other bills. However, this approach is not without drawbacks. First, both options use your home as collateral in addition to your existing mortgage, thereby transferring the risk to you. If you don’t pay, you could lose your home. Additionally, most lenders would rather refinance your existing mortgage, making a HELOC less popular among lenders.
Finally, you could avoid putting your house on the line by obtaining a debt consolidation or personal loan. With a personal loan or debt consolidation loan, you don’t have the option to pay interest only on the amount you use like a HELOC, and like a credit card, the APR generally is higher since your home is not used as collateral. While it still provides the benefit of consolidating your debt into one payment, you could pay more in interest over the life of the loan compared to a HELOC if you use the entire term to repay the loan.
Whichever method you choose, taking actionable steps toward consolidating your debt will put you on course toward a more manageable financial future.