When it comes to debt, having numerous loans and lines of credit, outstanding credit card balances and even a car lease can quickly tip the scale from manageable to unmanageable. Fortunately, you still have plenty of options to help you handle your debt even if you feel like it’s spiraled out of control. To deal with debt coming from several sources, consider starting a debt consolidation process.
Debt consolidation makes debt more manageable
At its most basic, debt consolidation takes all of your debt from various sources and combines it into a single debt with a bigger balance. This allows you to pay down all of your debt with one regular monthly payment rather than trying to manage multiple payments. You can sign up for debt consolidation using a variety of methods.
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Ways to consolidate your debt
One common way to consolidate debt is through the use of a personal loan. These are offered by banks, credit unions and private lenders. The institution you receive the loan from will either use it to pay off all your various debts or will simply give you the funds and leave it up to you to pay off your debts. Then, you’ll start paying back the debt consolidation loan according to its terms and at the agreed upon interest rate. Your rate is determined by your credit score and, if required, the quality of your collateral.
Home equity loan or line of credit
If you own property and have a significant amount of equity, you may also be able to consolidate your debt through the use of a home equity loan or line of credit, sometimes called a HELOC. These products allow you to turn home equity into cash, at an interest rate that’s typically lower than a credit card or payday loan.
HEL or HELOC funds are then used to pay off several high-interest debts, and you make payments on the one second mortgage or line of credit. This method of debt consolidation should be approached with caution, however. Because your home will be the collateral for the loan, you risk losing it if you can’t make payments.
Balance transfer credit card
While it’s not quite the same as traditional debt consolidation, in which many debts are combined into one, a balance transfer credit card can be used to turn high-interest credit card debt into low- or no-interest debt — at least temporarily.
A balance transfer allows you to move your entire credit card balance from one card to another. The new card will likely offer an introductory period, such as 12 months, in which the interest rate is 0%. This gives you some time in which to apply your payments entirely to the principal debt, reducing your balance faster than if you were paying interest.
Debt Management Plan (DMP)
A credit counselling service may offer a debt management plan (DMP) that will show you how to repay your debt in full over a set number of years. A DMP is generally intended for those who can pay all their debts in full, but may not qualify for a debt consolidation loan.
If your debt has become unmanageable, but you want to avoid filing for bankruptcy, a consumer proposal may be a good option. A consumer proposal is a legally-binding agreement facilitated by a licensed insolvency trustee. The trustee will distribute a lower than what you would normally owe lump sum monthly payment to all your creditors. Consumer proposals have a negative impact on your credit score and report, but may be preferable to bankruptcy.
Why consolidate your debt?
Consolidating your debt can make repaying it more manageable, but that’s not the only benefit of doing so. Here are some other reasons you may want to consolidate your debt:
- You can pay less total interest.
- You only have to deal with one single monthly payment.
- You can get a definitive end date to your debt.
- You can avoid missed payments if you no longer pay your creditors directly.
- You can use the opportunity to start rebuilding damaged credit.
Mounting debt can feel overwhelming, regardless of your income or the type of debt. The most important thing to remember is that debt relief options like debt consolidation exist, and taking action early is always better than avoiding it.
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