8 ways to consolidate debt
If you find yourself continually worrying about
debt -- it's time to seek out some solutions. Greg Pahl, co-author
Unofficial Guide to Beating Debt, and
Virginia Morris, co-author of The
Wall Street Journal Guide to Understanding Money & Investing,
offer these suggestions on consolidating your debt.
1. Credit card transfers.
Rate surfing only makes sense if you can pay off your outstanding
debt within the time frame of the low introductory rate. "By
the time you do all the transferring, the introductory period is
over," Pahl says. "I get this stuff in the mail a lot.
You really have to read it carefully. The change of a word or two
can change the whole thrust of the promotion."
To look for the credit cards with the lowest rates,
credit card search engine.
2. Home equity loans.
They're inexpensive, relatively easy to obtain and they may offer
a tax deduction for the interest portion of the loan. The downside
is that the collateral for the loan is the house. "A home equity
loan can be an extremely useful strategy if it's used properly,"
Pahl says, "but people need to have their eyes open and understand
The other disadvantage is
the low-pressure repayment terms. "Most lenders aren't in a
hurry for you to pay it back. The leisurely repayment schedule isn't
part of your goal," he says. "Your new monthly payment
should be at least as large as your previous monthly payments --
if you want to really make progress. If you can pay more, you should,
because you'll pay it off faster."
equity search engine lets you find the lowest rates for variable-rate
home equity lines of credit and fixed-rate home equity loans.
3. Retirement funds.
Most employers will allow loans from a 401(k) or other retirement
plan, but this should only be used if you have no other choice.
The interest is almost never tax-deductible, but you're paying interest
to yourself instead of a bank, Pahl says. If you can't pay it back
within five years, the IRS will assess taxes and penalties. Also,
if you quit your job, your employer will call the loan in full when
you leave. Accessing retirement funds does offer a way of lowering
your payments and speeding up the debt repayment process.
4. Life insurance.
If you have whole life insurance, you can borrow against its value.
There's no time limit and, Pahl says, "You don't really have
to pay it back at all. If you don't pay it back, the amount of the
loan is deducted from the benefits paid to your beneficiaries, so
you probably want to pay it back."
5. Family and friends.
Financial advisers, Pahl included, are universal in their advice
that personal loans are a great way to destroy a relationship. Still,
he says, it's an option. "If you've got a rich relative who
offers to help you through a tight spot, maybe you should just be
gracious about it. Just get it all in writing and make sure you
pay them back."
6. Your credit union.
Credit unions generally have lower interest rates and fees on loans.
If you're not a member, check with your employer, family members
or organizations of which you're a member to see if you're eligible
to join one.
7. A nonprofit consumer
credit counseling agency. Morris says this actually should be
your first stop. Experts in helping consumers get out of debt, they
work with creditors regularly to get late fees waived and interest
rates reduced. "They've heard it all. Nothing you will tell
them will shock them," Morris says. "What they often will
do is, rather than consolidating debt, you pay them a fixed amount
and they pay it out to your creditors. It's a kind of discipline
that can be helpful. It's enforcing a change in spending habits.
For the person who is serious about getting out of debt, that's
8. Renegotiate the terms
with your primary lender. "A mortgage lender would rather
renegotiate than repossess your home," Morris says. "They
can say no, but you can go to them and say, 'I know I'm behind.
Can we stretch out the payments?' It's an upfront relationship.
They do lose money if you default. Most lenders will renegotiate."
Pat Curry is a
freelance writer based in Georgia