Best debt consolidation strategies you can use to reduce debts

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Best debt consolidation strategies you can use to reduce debts

Best debt consolidation strategies you can use to reduce debts

Managing multiple unsecured debts while facing financial problems is a challenge. Sudden financial hardships and lack of funds makes navigating debt much trickier and more stressful. Without the means to pay back debts, you risk missed payments and ruining your credit. As a best practice, you should track your annual percentage rates and make payments on the higher interest debts first. But, if you can’t afford your bills, including your unsecured debts, then you should opt for a debt consolidation strategy to get out of your debts easily.

Debt consolidation comes with multiple strategies that you can follow to get you out of debt quickly. You can use those strategies to consolidate multiple debts into one, easing your financial burden. Let’s check out those strategies and use them to get out of debt.

Use DIY debt payoff strategies

The debt avalanche method

The debt avalanche method is simple, yet effective. To use this strategy, you need to prepare a list of outstanding debts based on interest rates. Sort the list, starting from the highest balance to the lowest. You need to focus on paying off the balance with the highest APR while making minimum payments for the other debts’ balance every month. You can speed up the process by increasing the payment amount for the debt you are focusing on. Once the highest debt balance is paid in full, focus on the next balance with the highest APR. This debt payoff strategy might take several months to pay off a high debt balance. But in the future, this strategy will save you money in high interest payments. Decide how much you can pay towards an unpaid account and maintain it every month until the debt is satisfied. This debt payoff strategy is effective for consolidating high-interest debts such as credit cards.

The debt snowball method

If you want quick results using a debt payoff strategy, try the debt snowball method. This strategy includes creating a list of unpaid balances starting from the lowest to the highest amount. You’ll focus on paying off the lowest debt amount first as your target account. You still need to make minimum payments to your other accounts every month, while making sure to make extra payments to the targeted account. Once you pay off the lowest debt balance, focus on the next card with the lowest balance. This debt payoff strategy is effective for people who want to get out of debt quickly. By paying off a few low balances, you can focus on paying off bigger unpaid balances and get out of debt as soon as possible.

Use credit card balance transfer

If you struggle with paying off your high-interest credit card balances, a credit card balance transfer would be the perfect choice for you. Using this strategy, you can consolidate your credit card debts by transferring high-interest credit card balances into a zero or low APR card. To transfer credit card balances, you don’t need any collateral or to pay any upfront fee.

Many credit card providers offer an introductory 0% APR on balance transfers. Try to find a 0% APR credit card and transfer the entire balance. This can save you a lot of money in interest payments. Remember, to get the lowest APR, you must have a good credit score.

Make sure you pay off the entire transferred balance within the introductory period. When the promotion expires, the low APR will automatically convert to the current APR, which can be as high as 24%.

Check for any balance transfer fees before initiating a transfer. Usually, credit card providers will charge you a balance transfer fee up to 5% of the amount transferred. You should also avoid using the balance transfer card for making new purchases. Some balance transfer cards charge a high APR for new purchases.

Opt for a debt consolidation program

You can choose a debt consolidation program to combine multiple debts into one. In most cases, credit counseling companies or non-profit organizations offer “debt consolidation programs.” These programs are a popular method of debt management.

A non-profit company will help you pay off your debts within three to five years. Through a debt consolidation program, the company will offer you counseling sessions and discuss your financial status. They will work with your creditors and set up an easy repayment plan. Through this program, you can consolidate only unsecured debts. Make sure you understand all information regarding their service fees and how they maintain your privacy.

A debt consolidation program can lower your overall interest rate, monthly payments, and the hassle of making multiple payments in a month. The program will appear on your credit report but doesn’t harm your credit score.

To choose from the best debt consolidation programs, you need to look for referrals and check local listings. Check online reviews and client testimonials to evaluate the companies. Select a professional credit counseling agency or non-profit organization that has a strong reputation.

Use debt consolidation loan

One of the most common strategies to consolidate unsecured debts is a debt consolidation loan. It is an unsecured loan used to pay off multiple unsecured debts at a time. You can take out a debt consolidation loan from financial institutions such as banks, credit unions, and lending firms as personal loans.

There are other types of debt consolidation loans that can be used to consolidate debt. The prime benefits of this strategy are a lower interest rate, easy monthly installments, and a longer repayment period. With a debt consolidation loan, your total debt amount stays the same. It only reduces the number of creditors and overall interest rate.

Let’s check out a few types of debt consolidation loans.

Take out a personal loan

A personal loan is commonly used for debt consolidation if the borrower can get a low annual percentage rate (APR) from the lender. The loan APR should be lower than the overall interest rate of your unpaid debt balance. In most cases, personal loans do not require collateral. You will need to show proof of income, and the lender will review your credit report to verify the loan application.

If the lender approves your loan application, you will have a fixed payment and a limited repayment period. If you have bad credit, your interest rate might be higher than usual. With the debt consolidation loan, you can pay off all the unsecured debts. You will only have to focus on one payment every month.

Make sure you know whether an origination fee and any other charges apply to your loan. You must also remember that, even though you have a lower monthly payment, with a longer repayment period, the overall interest could be higher in the end.

Borrow from life insurance

If you have a life insurance policy with good coverage, you can use it to take out a loan. Insurance loans do not require regular payments, and they carry low interest rates. If you can’t pay off the loan, the remaining debt will be deducted from the death benefit. There is no credit check to qualify, and the process is fast and straightforward.

However, cashing out a life insurance policy to consolidate debts is not wise. If you can’t pay off the loan, your beneficiaries won’t get the death benefit. In addition, you may owe taxes on the loan amount.

Use home equity loan or cash-out refinance

Similar to the life insurance policy, you may use the equity in your home and cash-out money. These loans are offered at low-interest rates and have high borrowing limits. You can use the funds from a home equity loan or cash-out refinance to consolidate all your debts. Your home is used as collateral, so you may lose it if the amount goes unpaid. Your home will be at risk of foreclosure if you can’t make your monthly payments.

Take out a loan from 401(k)

According to the IRS, you can take out up to 50% of the available funds in your 401(k) or $50,000, whichever is less. You can use that money to pay off debts and become debt-free. You have five years to pay off the 401(k) loan, plus interest. When you use the loan to consolidate debt, the loan will be considered an early withdrawal if you don’t repay it. You will face a penalty and have to pay income tax. You need to pay off the loan by the due date of your next tax return if you become unemployed. Borrowing money from retirement accounts is not a good debt consolidation strategy, as you may lose your retirement savings.