If you find yourself deep in debt, the options for digging yourself out can seem overwhelming. It is easy to fall prey to debt solutions that can put you in an even worse position. Thankfully, for those with a good enough credit score, there are personal loan options available that can be much better than many other alternatives.
Using a personal loan for debt consolidation could substantially lower how much you pay in interest. Personal loan rates are generally lower than credit card rates, so consolidating could save you hundreds, or even thousands, of dollars in interest payments.
Using a personal loan to reduce debt can have a few benefits. When receiving a personal loan, you are opening a new installment credit line and, if handled responsibly, it can help raise your credit score. A personal loan for debt consolidation can help eliminate debts faster and put you back on the right track.
Debt consolidation with a personal loan
Why personal loans are great for debt consolidation.
- Fixed Interest Rates: Consistent monthly payments through fixed rates that will never increase.
- A Clear Goal: By opting for a 30- to 60-month loan term, you know exactly when you’ll be debt free.
- Debt Simplified: Combine all of those credit card bills into one, simple monthly payment.
Additional ways to consolidate debt
For credit card consolidation, personal loans are our top pick. However, they aren’t the only option when it comes to debt consolidation. If you don’t have a large amount of debt, a balance transfer credit card could be a good fit.
Withdrawing funds from your retirement account might also be an option to consider. Of course, you could also lean on friends and family if your debt is something a little more manageable. Here are just a few debt consolidation options to consider along with the tried-and-true personal loan.
Balance transfer credit card
Pros: Some balance transfer credit cards offer more than a year of 0% interest. In most cases, that’s more than enough time to get a handle on your debt.
Cons: There might be some balance transfer cards that come with a small transfer fee. You’ll want to be aware of this when shopping around for a card.
It might seem strange to tackle credit card consolidation with another credit card. However, a balance transfer credit card could be a faster and simpler solution if your credit card debt is manageable.
Balance transfer credit cards work by giving you a place to transfer an outstanding balance. This is usually a boon considering many of these cards come with a period of 0% interest. Say you’re paying off an outstanding balance of $1,000 on a card and you’re not making any progress with the current interest rate.
You could transfer that balance to a balance transfer credit card with 12 months of 0% interest. Then you would be able to cut down that balance while having a full year without interest.
Withdrawing funds from your retirement account
Pros: It’s your money which means you’re not going to have to present proof of good credit.
Cons: This could lower your retirement savings and you could get hit with the aforementioned early withdrawal penalty. Furthermore, you might not be able to take out the entire fund in one lump sum which might not be too helpful for quashing a larger debt.
If you have a 401k or an IRA, you might be able to draw emergency funds if you need money in a pinch. Unfortunately, there are possible repercussions to consider.
Tapping into your retirement funds can be a little tricky. If you’re under the age of 60, then you could get hit with an early withdrawal penalty. This alone could severely decimate whatever funds you had in your account and make things tougher when the time comes to finally retire.
If you can avoid using your retirement funds for debt consolidation, then you should. Especially since, in most cases, the money you keep in your 401k is protected from creditors.
Borrowing from friends and family
Pros: Your best friend or family member probably won’t charge you interest and you don’t need immaculate credit.
Cons: Tread carefully as this has the potential to cause a huge shift in your relationship. Be sure to have clear, open communication to avoid broken trust and hurt feelings. In a word: transparency.
It can be hard reaching out to friends and family when you need some financial assistance. In some cases, it might even be a last resort. However, it doesn’t have to be so dramatic.
After all, your loved ones are supposed to be there for you in good times and bad. It’s perfectly reasonable to lean on your friends and family when you’re in a financial bind. Just make sure you approach this transaction like you would with an actual lender.
Put together a detailed plan outlining exactly how much financial aid you require. Include your income and give your loved ones an idea of how long it will take to pay them back should they decide to help. Make sure you get everything in writing so everyone has reasonable expectations moving forward.
Debt consolidation tips for staying in the clear
For some people, the only thing harder than getting out of debt is staying out of debt. There are so many potholes and pitfalls in life that it can be exceptionally easy to find yourself in the hole, again. Luckily, there are lots of things you can do to help you stay free of debt.
Whether it’s putting together a detailed budget for the household or little things to keep you focused, you can stay out of debt. One of the key cornerstones of debt consolidation is having the attitude and stomach for decisions that will help change your life for the better.
Here are some tips that can help you stay free and clear of any future debt:
Build a budget
Once you’ve mastered credit card consolidation, the trick is to avoid any frivolous charges down the road. Unfortunately, the absolute ease of just swiping a card makes this a very difficult problem. That’s where a budget can really help.
By putting together a budget, you’re essentially taking inventory of where all your money is going. You know what to expect from your monthly utilities or how much is being spent on groceries. A good budget can even tell you how much money you have left over once you pay all of those important bills.
While building a budget can be as simple as digging out a notepad and pen, there are also plenty of online budget calculators. Additionally, once you build this budget, you can track your spending and start figuring out what purchases you can do without. That helps free up funds which can go toward preventing another slow descent into debt.
Avoid converting to secured loans
When it comes to debt consolidation, some people think that secured loan types like home equity are a quick way out. Unfortunately, this is not always the case and these particular loan types can come with some pretty harsh strings attached.
Because they are secured loans, they are backed by collateral. Take the home equity loan type, for example. This loan places your home as collateral which means that, were you not able to pay it back, the lender could take your home.
In situations where money is tight and you need a personal loan, you should stick with unsecured loans. Unlike secured loans, these are not backed by collateral and are more determined by your credit score. This does not, however, mean you’re off the hook when it comes to paying these off. Failure to keep up with payments on an unsecured loan could have adverse effects on your credit history.
Track everyday spending
You could consider this an add-on to the tip on budgeting we covered, earlier. However, it’s worth reiterating just how important it is to get into the habit of saving money. It’s easy to think that you can risk splurging every now and again now that you’ve survived your debt. Unfortunately, this way of thinking can lead you straight back into the hole.
Take some time out of your busy day to jot down on a notepad all the purchases you make in a day. By doing this, you gain a clearer picture of what you’re everyday spending is like. Then, you can start crossing out the things you no longer need.
“Everyday expenses” are an important variable for any successful budget. Just make sure you’re being honest. In fact, it might not hurt to round up all of those expenses to the nearest dollar. That way, you’re actually allowing yourself some wiggle room.
The bottom line
When it comes to credit card consolidation, there are lots of things you can do to get out of debt. Far and away, our top recommendation is an unsecured loan, but it doesn’t just end there. Once you have gotten the hang of debt consolidation, you need to be your own sponsor and really stick to what you’ve learned. The only thing worse than falling into debt is finding yourself in the hole a second time around.