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According to the Federal Reserve, reported consumer debt increased by billions in April 2020. So, if you’re struggling with debt, you’re definitely not alone. If you’re looking for a way to dig yourself out of debt, a debt consolidation loan could help.
But what is a debt consolidation loan? Find out if it’s the right option for you—and learn about some alternatives.
A debt consolidation loan is exactly what it sounds like. It’s a loan that consolidates, or combines, your debts under a single account. Some potential benefits of debt consolidation include:
Your options depend on your credit, existing assets and how much debt you want to consolidate. Learn more about a few common debt consolidation loan options below.
Tip: Don’t pocket the money that refinancing frees up every month. Instead, use it to create an emergency fund. Once that’s set up, use the money as prepayment against your home loan or to boost retirement savings.
Apply for a balance transfer card if your credit is in good shape or call a card provider to ask if they would be interested in offering you a balance transfer option on an existing card. Balance transfers work when you can transfer higher-interest credit card debt to a card with lower interest rates. Some balance transfer cards offer 0% APR for a year or two on new balance transfers for new account holders.
Tip: Keep your old credit card accounts open for extra benefits to your credit score. It helps your credit utilization rates and credit age. But if you use those accounts, you could end up back in debt again.
If you have retirement savings, you might be able to borrow from it to pay off debt. Remember, though, that you’ll need that money later. Only consider this option if you can pay back the money quickly, so you don’t lose time building your retirement funds.
Tip: Consider this option as a last resort loan or if you have some money coming in soon, such as from a tax return. If you can pay the money back within a month or two, you don’t have as much to lose.
If you know someone who has some extra money, it might be worth asking them for a loan at a low interest rate. You can use the money to pay off your debts and then make one monthly payment to the person in question.
Tip: Treat the transaction as you would with a bank or other lender. Put everything in writing, agree to fees or penalties if you miss payments and strive to make timely payments.
Personal loans are not the same as loans from friends or family members. Personal loans aren’t from people you know. They’re loans that often don’t require security or collateral. Typically, they’re short term—which means you pay them back within a few months or a few years.
But if your credit is decent, you might be able to score a personal loan with better rates and terms than your current debt. That’s especially true if you’re dealing with credit card debt.
Tip: Ensure you’re in a financial situation that allows you to pay down the new debt without running up more debt. You don’t gain anything if you take out a personal loan to pay off high-interest credit card debt, only to create more credit card debt at the same time.
If you don’t have enough income to pay your debts at all, consider whether a debt consolidation loan is right for you. Other options can include:
A debt consolidation loan is a way to reduce high-interest costs or create a more manageable debt payment option. It canreduce the amount you owe each month to make debt more affordable, but it doesn’t make debt go away. Debt consolidation could be a good option if you’re dealing with debt collectors and want to convert old debt to something new that isn’t past due or in collections.