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Living with debt is by no means easy. There’s the constant concern of living paycheck to paycheck and the never ending issue of covering monthly bills and living expenses. While most of us pride ourselves on being self-sufficient, it’s hard to ignore that we all sometimes live well beyond our means. Whether it’s needing money for emergencies, losing a job and needing to cover expenses, or just having come across some bad luck, dealing with debt is a real burden for a large number of people. However, you don’t have to live with debt. There are solutions and it starts with making a decision to no longer accept the status quo. You’ll no longer live with debt and will eliminate it altogether. So how is this done? Well, there are several debt consolidation options. What is debt consolidation and which option is best?
1. Using a Debt Consolidation Loan
Debt consolidation loans are a solid option to get back on your feet. They work by amalgamating all your debt into one large sum. This means all of your debt from multiple credit cards and bank loans will be combined into one consolidated loan. This allows you to make one monthly payment towards your debt and avoid the hassle and confusion of managing multiple payments. In addition, your monthly payments will decrease as will your interest rates. This allows more of your payments to go towards paying off your outstanding balances. You’ll also increase your own disposable income and will have better cash flow, providing you with ample opportunity to pay other bills and expenses. Here is a summary of the benefits.
• One single monthly payment.
• Lower monthly payment.
• Lower interest rates.
• Increase disposable income.
• Debt consolidation empowers you to pay other bills and expenses.
2. Consolidating Debt With Balance Transfers
Another option is to consolidate debt on your own by moving balances from one low interest rate credit card to another. However, this can be both time-consuming and extremely difficult to manage. There is also the risk of it backfiring. After all, most credit card companies offer low interest rates for trial periods only. Once these periods end, credit card interest rates skyrocket upwards, making any short-term gain a long-term worry. While some individuals have been able to make this approach work, it really is ideally suited to those instances where you have multiple small balances on multiple credit cards. Also, moving funds from one card to the next does nothing to reduce your overall debt. This is especially the case if you aren’t making enough payments to bring down your balances.
3. Using a Debt Settlement Program or Outside Debt Management Company
Some individuals find the entire process of eliminating debt to be incredibly stressful. To alleviate these concerns, many opt to working with a debt consolidation company or through a debt settlement program. A debt settlement program is often seen as a last resort before bankruptcy because you have to go past due during the program in order for it be effective. That said, it can help you get out of debt for less than you owe with a much lower payment. If you have serious debt concerns, this may be your best option.
4. Using a Home Equity Line of Credit & a Home Equity Loan
One of the more popular options is to borrow against the liquidity within your home. A home equity line of credit, or a home equity loan, will allow you to use the liquidity within your home to pay down your outstanding balances. Some individuals refer to these borrowing vehicles as a “second mortgage”, but there is a distinct difference between the two options. The home equity loan is like any other loan. Its terms are based on making specific payments until the total amount borrowed is finally repaid. The home equity line of credit operates like any other credit line. It is viewed as open-ended in that it requires your discipline to bring down the amount you’ve borrowed. The problem with the equity line of credit is that rarely do individuals properly manage their credit lines. Instead of making payments, they allow those balances to remain. This allows the creditor to continue to draw monthly interest on your outstanding balances.
5. Taking Money from Savings & Retirement
If you have money that can easily be transferred to your debt, then it’s likely a good idea to go ahead and transfer that amount. Don’t view this as losing money. With credit card interest rates anywhere from 20% to 30%, you’d be hard pressed to find an investment that can produce the same returns. That 1.5% or 2% interest rate on your savings account, is easily eroded by those aforementioned exorbitant interest rates. When it comes to your registered retirement account, be cognizant of the withholding tax that comes from making an early withdrawal. Whether it’s your RRSP, 401K or your Personal Pension Plan, there will be fees for early withdrawals. Make sure to account for those fees when considering this option.
Unfortunately, there is a price to pay for all those impromptu purchases. There is a price to pay for taking too many credit card cash advances. While most of us don’t live vicariously on credit, there are still those instances were we are forced to borrow large sums of money. It happens all the time to all kinds of people. Sometimes it’s our own doing and yet other times it’s through no fault of our own. When confronted with high debt, take the time to investigate all your debt consolidation options. Be cognizant of the pros and cons of each approach and be mindful of the fees, interest rates and hidden costs of each option. |
