Whether we like to admit it or not we have become a nation of debt junkies. A report issued earlier this year by the US government was that the average credit card debt per household in the United States is $15,607. US households also have an average of $32,656 in student loan debt and an average of $153,500 in mortgage debt. And as a whole we owed total of $11.63 trillion.
One simple solution – the debt consolidation loan?
If your debts have spun out of control and you’re looking for some relief, there is a simple solution. It’s a debt consolidation loan. This could be a personal loan or a secured loan. In either event, you would use the money to pay off all of your other debts. This would leave you with just one monthly payment to make each month, which should be much less than the sum of the payments you’re currently making.
How to know if consolidation loans make sense
Before you rush off to your bank or credit union for a debt consolidation loan there are some things you need to know in order to understand whether it makes sense.
The first of these is that the interest rate on your debt consolidation loan should be lower than the rates of the debts you’re consolidating. If you have three credit cards with interest rates of 22%, 20% and 18% your average interest rate would be 20%. If you were to transfer the balances on those three cards to a new one with an interest rate of 15% or get a debt consolidation bank loan at 10% and use it to pay off your credit cards, you would definitely improve your situation.
A second factor is to make sure you would reduce the total amount of money you have to pay on your debt each month. A third factor is that you don’t trade fixed-rate debt for variable-rate debt. While a variable rate loan can look very enticing because of its low interest rate, there is a risk with this type of loan. The interest rate could start low but then increase over time so much to the point where you end up paying more on your debt each month than you did on the debts you consolidated.
Finally, you need to be in a position to pay off that new debt as quickly as possible and make sure you don’t take on any other additional debt until you pay off the debts you consolidated. One of the problems with debt consolidation loans is that too many people consolidate their debts then get deeply in debt all over again because they’re just poor money managers and have spending problems. For these kind of people, a debt consolidation loan can be a very dangerous, no-win proposition.
Options for debt consolidation
There are several ways to achieve debt relief in addition to debt consolidation loans. As mentioned before, you could transfer your high interest credit card debts to one with a lower interest rate or even better a 0% interest balance transfer card. Some of these cards offer 18 months interest free, which would give you a year and a half to pay off your balance before you were required to pay any interest at all.
Second, if you have a whole life insurance policy you could borrow from it. Failing that you could maybe borrow from your retirement account. If you have a 401(k) and borrow from it you will have to pay interest on the money but you will be paying interest to yourself. One note of caution about this – which is that if you don’t pay all the money back within six months, it will be treated as ordinary income and taxed accordingly.
The third option is to get a debt consolidation loan from your bank or credit union. There are two types of debt consolidation loans – secured and unsecured. An unsecured or personal loan doesn’t require that you pledge an asset to secure it. These loans are often called signature loans, as all you need to do is sign for it. In comparison, a secured loan is just that. You are required to put up an asset to secure it. Unless you own a large RV or boat free and clear or some other valuable asset, you would probably be required to pledge your house in order to get a home equity loan or homeowner’s equity line of credit (HELOC). Unsecured loans are better in that they don’t put any of your assets at risk but generally come with higher interest rates. Secured loans generally have lower interest rates but if you were to default your lender could literally repossess your house and leave you out on the street.
You can’t borrow your way out of debt
This is one of the sad facts of life. With debt consolidation loans all you’re really doing is moving your debts from one set of lenders to a new one. The new loan you will need could take as many as 10 years to repay and will cost more in interest than if you were to simply pay off your debts the conventional way. One way to do this that’s become extremely popular in the past five years is called debt settlement. This is where a company such as National Debt Relief negotiates with your lenders to get your debts reduced to a fraction of what you owe. Plus, this can be a form of debt consolidation as when you choose a company such as National Debt Relief to handle the negotiations you will have a payment program with just one payment to make a month for two to four years – depending on the amount of your debt.