Eight Ways to Consolidate Debt

Next to winning the lottery, a debt consolidation loan is a debtor's dream. With one monthly payment and a fixed monthly payment schedule, you can actually see an end to those monthly payments.

In reality, consolidating bills isn't always easy. If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate. And if you're not careful, you can end up deeper in debt than when you started.

Your goal in consolidating your debt should be to lower your overall costs. To accomplish this there are two things to keep in mind:

1. Get the lowest interest rate possible

2. Have a plan to pay off your debts in 3 ? 5 years.

Here are some of the best ways to consolidate:

Using Credit Cards

The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. And since credit card issuers don't require collateral, you aren't "risking the farm."

Call your current issuer to ask what interest rates they will offer you if you transfer balances from other cards over to theirs. Go for a fixed rate if you can get it, and ask them to waive any transfer fees. If you can't negotiate a low rate with your current issuer, try shopping for a new card at a site such as CardRatings.com. But be careful! Too many applications for credit in a short period of time can hurt your credit rating.

Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3 ? 5 years.

Home Equity Loans

With a home equity loan, you borrow against the value of you home, minus any other mortgages. The two major kinds are:

1. A Home Equity Loan ? a fixed amount of money for a fixed period of time (sometimes at a fixed rate) and

2. A "Home Equity Line of Credit" where you borrow up to a pre-approved credit limit (interest rates usually variable) and can borrow again if you still have money available.

These loans can offer attractive rates, low payments, and the interest is usually tax-deductible if you itemize.

Many issuers offer no or low closing costs for these loans. Interest rates are often variable, however, and there's always the risk that you can lose your home if you can't pay.

Cash Out Refinance

Refinancing your home and taking out money to pay off bills (called "cash-out refinance") is yet another way to tap the equity in your home. If you can refinance at a substantially lower interest rate, you'll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low.

One option to consider: an interest-only loan. By lowering your monthly payment, you can free up money to use toward paying down other high-rate debt or building a retirement fund.

Make sure you understand the total cost of refinancing. Take any money you've freed up by paying off other bills and use that to create an emergency savings fund.

Traditional Debt Consolidation Loans

A debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lender's security is you. Because lenders consider them risky loans, they're usually more expensive and not always easy to get if you have a lot of debt.

If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method of consolidation. However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate.com for current averages). Remember, to calculate the total cost of the loan from start to pay-off.

Credit Counseling

Credit counseling agencies may help you get out of debt, though they don't actually consolidate your debt.

Instead, payment plans (usually with lower interest and fees) will be worked out for all of your eligible debts. You'll make one monthly payment to the counseling agency, which will pay all your creditors.

Participating in a credit counseling program generally won't hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years. But be careful which agency you work with. If the counseling agency pays your bills late, you'll pay the price since you're still responsible to the lender. It happens.

Debt Settlement

Debt settlement is another option that's become increasingly popular with consumers who have a lot of debt and can't, or won't, file bankruptcy. You stop paying your bills and instead make a regular monthly payment to the settlement company. Your creditors contact them, and not you, about your overdue bills. As your accounts fall further behind, the negotiation company will settle your balances ? usually for 50% of the balance or less (including fees) depending on the debt. Most people can be out of debt in less than two years or less using these programs.

It's not perfect. Your credit rating will be hurt in the short run and you must be certain you're dealing with a reputable company or the money you pay each month could disappear. Still, for consumers who can't shoulder the burden of debt they have now, it can be a very good option.

Retirement Loans

If you have a 401(k), 403(b) plan or certain types of pension plans, you can borrow against your nest egg. (You can't borrow against your IRA.) It's easy, with no income qualifications or credit check.

The key here is to borrow against your retirement account, rather than withdraw from it early so that you don't end up paying taxes and a 10% penalty. Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal.

These loans typically offer low interest rates, and interest is paid to you, since you are the lender. While tapping your next egg like this can short-change your retirement, so can costly debt payments. If you are in your 20's and 30's,you obviously have more time to rebuild a retirement nest egg, but even if you're in your 40's or 50's, you will want to weigh the cost of paying the high interest of the debts over time, versus borrowing from your retirement account. The return you get from paying off high-rate debts is guaranteed ? while the stock market isn't.

Rapid Repayment

There is a mathematically optimal way to pay your debts. Choose a fixed level monthly payment, and commit to it each month. Pay as much as you can on the highest rate debt first, while payment the minimums on the rest.

I almost always suggest consumers with debt start by creating one of these plans. Many people who do so find they don't even need to consolidate to get out of debt in the next few years. They just need a plan and they can do it on their own.

Overview

The biggest mistakes people make when it comes to consolidation are:

A. Not having a plan for paying the debt off after they've consolidated, and

B. Procrastination. Waiting for the "perfect" solution to come along almost always means you'll end up deeper in debt. Choose your approach, and start getting out of debt today!

For more information on dealing with debt, visit www.stopdebtcollectorscold.com.

Gerri Detweiler is considered one of the country's top credit experts. She has been interviewed in thousands of radio, television and print news stories including USA Today, The Wall Street Journal, The New York Times, Dateline NBC and many others. She has testified before Congress several times and worked on reform of the national credit reporting laws.

---

Life After Bankruptcy

Bankruptcy and Credit - What Happens After Your Debts Are... Read More

The Road to Debt Relief

Living with debt is not something someone hopes for, but... Read More

Should You Join a CCCS - Consumer Credit Counseling Service for Debt Relief and Financial Freedom?

Do You Need to Join a CCCS - Consumer Credit... Read More

Bankruptcy - The New Scarlet Letter

Nathaniel Hawthorne's book The Scarlet Letter states in Chapter 2,... Read More

Bankruptcy Reform

There are some new bankruptcy laws going into effect before... Read More

Bouncing Back from a CCJ

Should you be unfortunate enough to face a CCJ ?... Read More

IVA: Individual Voluntary Arrangement

What Is an IVAThe IVA (Individual Voluntary Arrangement) was introduced... Read More

Debt Consolidation and Personal Finances: Learn the Truth!

An inability to manage credit, growing debt and bankruptcy are... Read More

Bankruptcy - Your Fresh Start

Most American consumers are living too close to the edge.... Read More

Individual Voluntary Arrangements- A New Alternative to Bankruptcy

This May, the Department of Trade and Industry in the... Read More

Bankruptcy: What the New Law Means to You

On April 20 of this year, President Bush signed a... Read More

Get Debt Free

If you once have been caught in the debt trap,... Read More

Start Small and Your Wealth Will Get Bigger

We've all heard the phrase, "You have to start somewhere."... Read More

Eliminate Your Credit Card Debt, But How?

Can a debt consolidation loan eliminate your credit card debt?... Read More

Debt Elimination

If you're reading this article right now I'm sure that... Read More

Corporate Debt Management ? Perspective on the Why

Entrepreneurs have a tough time in their formative years. They... Read More

The Effects of Consumer Debt

Consumer Borrowing Consumer borrowing in the UK has now crashed... Read More

How To Avoid Medical Collections

With medical collections costing doctors millions upon millions of dollars... Read More

The Last Debt Solution Should Be Bankruptcy

A debt solution like bankruptcy should really only be used... Read More

You Can Make Financial Resolutions Anytime

The New Year often brings with it a desire to... Read More

Are You Beating Up On Yourself About Debt?

When you hear the word "debt", whats the first thought... Read More

Free Quick and Easy Money Saving Tips ? Part 1

With the high cost of gasoline and the amount of... Read More

Personal Debt Reduction Practices

Personal debt reduction practices, the steps people take to relieve... Read More

Christian Debt Consolidation ? Feel Comfortable About Managing Your Debt

Many Christians feel uncomfortable with the notion of being in... Read More

Life After Debt ? Strategies for Dealing with Problem Debt

Honorably and ethically rid yourself of burdensome debts using the... Read More

The ONE Law You Should Be Breaking

There is a law all smart people break.Parkinson's law.Parkinson's law... Read More

Debt Recovery Can be Easy

OK, so you are up to your head in debt.... Read More

Credit Repair? Its All Up to You

Log onto to a search engine such as google.com and... Read More

Bankruptcy Abuse

Bankruptcy is little more than a smack on the hand... Read More

Debt Elimination Is The Key to Financial Freedom

If you want financial freedom, the first thing that you... Read More

Turning Bad Debts into Good Debts through Investing Fundamentals

If you've ever earned enough money to put some aside,... Read More

What is Debt Settlement and How Does it Work?

Debt settlement involves negotiating with a creditor or creditors to... Read More

Debt Elimination 2

The First Step To Debt EliminationRegardless of your personal and... Read More