The trick is to get a firm handle on what you can do comfortably and figure out which set of cons represent the easiest downside for your circumstances.
Experienced people routinely advise their protégés to avoid “putting all of their eggs in one basket.” This is sound advice in most cases. However, going against this advice could well be your best play when it comes to paying off your debts. After all, combining several obligations into a single one leverages a number of distinct advantages.
Here are some approaches to consolidating multiple debts to consider.
How Consolidation Can Save You Money
Experian, one of the leading credit reporting bureaus, offers this example of how consolidation can be advantageous:
“Let’s say you owe $10,000 in credit card debt with an average APR of 22 percent and you’re paying $400 every month to meet the minimum payments.
It would take approximately 184 months to pay off those debts and you’d incur interest charges totaling $8,275.44. In other words, you’ll borrow $10,000 and pay $18,000.
Meanwhile, you could pay off a $10,000 consolidation loan in only 60 months and save over $5,200 in interest if you got approved at 11 percent with a fixed monthly of $217.”
Looks great — right?
Well, there are a few caveats to consider.
Types of Consolidation Loans to Consider
Home Equity Loan or Line of Credit: The beauty of this approach is you can get 15 years or more to pay off the debt. That makes a $10,000 balance somewhat easier to deal with each month. Plus, offering your home as collateral will make qualifying easier — assuming you have sufficient equity in the property. You’ll get a great interest rate too if your credit score is strong.
All in all, this is a sound strategy.
However, you will encounter several different fees and expenses when you go this route including paying for a home inspection as well as closing costs. Oh, and one more thing: You’ll be exchanging unsecured debt (the kind you can walk away from with impunity) for secured debt. In other words, you could lose your house if this goes sideways.
Debt Consolidation Loan: A number of companies specialize in this area — in-person and online lenders. Be careful to find a reputable organization. Those struggling with substantial debt can also find out if they’re eligible for a hybrid settlement/consolidation program like the one offered by Consolidation Plus.
You’ll also need to pay attention to the potential ancillary fees some of these companies impose. Debt consolidation loan companies are generally more costly than banks or credit unions; contemplate all of those factors to ensure you’ll come out ahead.
Balance Transfer: In this scenario, you’ll find a low or no-interest card without transfer fees and cardholder fees for the first year. You’ll typically need to pay that balance off within a year or so to take advantage of the introductory offer.
This might be doable with a lower balance, or if you’re expecting a significant windfall. Keep in mind though, those deferred fees and interest charges can be quite steep if they’re allowed to come into play.
Personal Loan: A strong credit score and a solid income could net you a $10,000 loan on your signature alone from a bank or a credit union. This approach offers the fewest downsides.
You won’t have to put your property at risk, plus these organizations are typically more affordable sources of loans.
However, there can sometimes be loan origination fees with which you’ll have to deal if you go this route. Some credit unions will also require you to be a member.
How to Choose?
As you can see, each of these approaches to consolidating multiple debts has pros and cons. The trick is to get a firm handle on what you can do comfortably and figure out which set of cons represent the easiest downside for your circumstances.
Make it a point to stop using your credit cards while you’re paying off the loan — regardless of the strategy you choose. Otherwise, you’ll run the risk of having a bunch of new credit card bills plus a consolidation loan to pay off.
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