The Best Way to Consolidate Debt
When debt is hanging over your head, and every dollar seems to go towards interest on your balances, paying down principal balances can feel like an impossible feat. With nowhere to turn, many people often consider consolidating debts to decrease monthly payments, lower interest rates and pay off balances faster. While consolidating debt can be a great option under certain circumstances, combining debts into one account comes with potential downsides. However, there are many ways and various options to manage multiple sources of debt.
Understand Your Financial Position
InCharge Institute of America, Inc., recommends that the first step you should take when considering debt consolidation should be obtaining a copy of your credit report and tallying up all the outstanding debts you currently hold.
Your credit score, debt-to-income ratio, and other key factors will be used to determine if, and what, you qualify for when it comes to consolidating your debt through a financial institution. Understanding your situation as it stands will give you, and your potential lender, an initial feel for your financial solutions.
Consider Your Options
Before making the decision to consolidate your debts, consider every option on the table. With today’s housing market on the rise, home inventories low, and more interest rate hikes on the horizon, refinancing your home loan could be a viable option. Although the market may be slowing or peaking in some regions (take a look at houses for sale in Atlanta, Ga. for instance), in many areas the market is still relatively hot, so selling or refinancing could be options worth considering depending on your situation.
Reach Out to Friends and Family
Borrowing money from a family member or friend can be a personal challenge. Asking for help from those who know us best and who we interact with regularly can be a struggle as the fear of judgment or a debt weighing on a personal relationship can influence the way we communicate with one another.
However, many of us have an uncle, aunt, grandparent, or another family member in a much better financial position who not only is able to help but who would do anything they could to better your financial situation with a loan. We all are stubborn and often too timid to ask for help during financial hardships, but many times others would be happy to help.
Consider a Personal Loan
After working through all of the options, you may find yourself in need of a personal loan, assuming your credit score and other financial circumstances warrant taking out a loan. Firstly, you should determine your weighted interest rates on the debts you owe.
This can be quickly done by multiplying each outstanding debt by its current interest rate and dividing the sum of these numbers by the total debt you owe. Knowing your weighted interest rate will help you when financial institutions offer you a new rate on your consolidated loan. Usually, consolidating only makes sense if your new interest rate will be lower than your weighted interest rate. Also, variable interest rates should be taken into consideration. With more rate hikes expected in the near future, you may be able to get out of your variable rates by locking yourself into a lower fixed interest rate.
Conclusion
Consolidating debt is not for everyone. Financial situations are unique and require a lot of thought and several consultations to determine if consolidating is your best option. There are many debt consolidation websites, such as debt.org, to help you navigate this tough decision.
Sometimes merely paying down your debts, starting with the highest interest rate, may make more sense in the long run. Other times, consolidating may save you hundreds, or thousands, in the long run, while also creating a more sustainable payment plan in the short term.
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