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Written by: Shiv Nanda
People, who have multiple loans in the form of credit card bills, house loans, personal loans, etc., know the struggle of remembering individual payment dates. And of top of that, overdue payments can create taxing financial situations and even debt traps that may be difficult to get out of. In such times, debt consolidation can help tremendously.
In this article, we explore what debt consolidation is and how to consolidate debt. Read carefully.
What is Debt Consolidation?
Debt consolidation is a way to combine individual debts by taking out a new loan and using the amount to pay off the outstanding debts. This way, you can not only enjoy a lower overall interest rate, but you can also stay on top of your bills since you would only need to pay a single instalment every month.
How to Consolidate Debt?
Let’s read about some great ways to consolidate debt.
1. Balance Transfer
Several credit cards offer debt consolidation loans at 0% for a limited time. So, if you are approved for a balance transfer card, you can consolidate your loans and enjoy an interest-free period. However, make sure to check the duration of the promotional period and understand exactly when you will need to start paying interest. Also, any new charges on your card will not be subject to the promotional interest rate. So, learn all about the transfer card before actually transferring the balance.
2. Personal Loan
There are several reliable lenders today that offer personal loans for debt consolidation. You can choose to pay the debt over a longer period and even repay the outstanding debt earlier if you want. Moreover, you can avail personal loan right from your mobile device without much hassle.
So, if you don’t mind paying extra in the form of interest rate in return for more streamlined and shorter monthly payments, a personal loan may be a great option for you.
3. Home Equity Line of Credit
Home equity line of credit offers loans at an interest rate lower than other debt consolidation techniques. But it is a risky option since you will be required to put your house up as collateral. Therefore, if you are unable to make payments on time or fail to repay the total amount, you may end up losing your home.
So, a home equity line of credit is only great when you know that you can keep up with the monthly payments and pay off the debt amount on time.
4. Cash-Out Mortgage Refinance
Cash-out refinance is when a borrower refinances their mortgage for more than the outstanding loan balance. This way, the borrower can withdraw the cash difference and use that amount to pay other debts. With this mortgage, you can roll other debt payments into a single payment. And since the mortgage is secured, you may also get an interest rate lower than the original debt.
Debt consolidation enables disciplined repayment of loans since it allows paying a fixed sum every month on the same date. And this is much easier than keeping up with different repayment schedules.
So, if:
- You can pay a fixed amount under a debt consolidation loan.
- You have a sufficient cash flow to make repayments without any delays.
- You are comfortable with paying extra over a longer repayment period.
- You have a good credit score to get approved for a debt consolidation option.
- You are certain that you will avoid more debt.
Then you can go ahead with the debt consolidation technique that works best for you. Make sure to have a repayment plan in place before you sum up your debt.
Related: 10 Ways You Can Pay Off Your Student Loans
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India's first app-based credit-line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, and personal financial matters and when they want to get a loan. He has made it his life's mission to help and educate people on various financial topics, so email him your questions at shiv@freopay.com.