Three ways to consolidate debt and reduce interest |
By David Pilley on July 25, 2011
.jpg.aspx) What is the best way to consolidate your debt? Is the easiest way the same thing as the best way? Well, the best way depends on your individual situation, so the best and the easiest may be the same thing. Here’s a look at the three main ways to consolidate your unsecured debts.
Balance transfer. First, we’ll start easy. A balance transfer is a simple combination of all your credit card debts into a single card, either an existing account or a new one. The new card will most likely have a teaser rate, or a low introductory interest rate. Many of these teaser rates are 0%, and this can be a boon to you if the interest rates on your current credit cards are all in double figures percentage-wise. You need to read the terms of this new card because teaser rates are temporary, and the interest rate will usually go up after a six month period.
Personal loan. It may seem odd that getting a new loan can help reduce your current debt, but it is possible. While a loan does not have a teaser rate like a credit card, its interest rate can be about half of what your current credit cards have. If you can get a secured loan, the interest will be even lower, though you must put something up as collateral.
Home equity loan. This is the most common type of secured loan you can get, which is placed against the equity of your home. Interest rates for a home equity loan are usually in the single digits, and the interest on the loan may be tax-deductible. The loan’s term may last a couple of years, and the penalty of defaulting on this loan may be foreclosure.
So which is the best for you? It all depends on your financial situation and your plans. A balance transfer may be best for you if you plan to eliminate your debt in a short period of time. With your credit cards, you might have had interest rates above 20%. Many consolidated credit cards have an introductory rate of 0%, so you can make up some serious ground if you pay off most or all of your outstanding balance in this six month period of little or no interest. However, a balance transfer might not improve your credit score, since it appears to creditors that you have opened up another credit card. Getting a personal loan or home equity loan may improve your credit score a bit, but there is no period of little or no interest rate here. The lifetime of a loan may be a few years, so this option can work if your amount of debt is small. The reason you may have been in debt is because you lost your job, so if you find a new job, you might take out a loan because you are making money again. Of course, a new loan works only if you make timely payments, so having a reliable source of income is crucial. Consider yourself lucky if you ask a family member and he/she can offer you some money, as a balance transfer and a new loan are your main options for consolidating your personal credit card debts.
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