How To Choose The Best Option For Debt Consolidation | Credit Direct Blog

With a new year comes new opportunities. Make this the year you reach financial freedom, and make the move to consolidate your debt. Though getting rid of debt can be a tall task, choosing a plan is the first step on your way to success. Many plans require collateral, high-interest rates, fees and strict repayment schedules, which adds stress to an already stressful situation. Here are some tips about different debt consolidation scenarios, that can help you decide which solution is best for you.


Borrowing from Friends and Family

When borrowing from people you know, there is the benefit of a flexible repayment schedule and no fees. Sometimes, friends will give you a loan with little or no interest rate. However, this option is often only available from people who are financially stable with a capacity to loan money. Borrowing from friends and family can also lead to friction within the family.


Balance Transfer

Balance transfers entail moving your credit card balance from a high-interest card to a lower interest card. It’s a process that can save you thousands of dollars when you obtain a card with a 0% introductory offer. Be aware, though, that the introductory rate on a credit card often lasts for only a year, after which time the interest rate can skyrocket. If you still have a remaining balance on the card, you’ll find yourself in the same position you were before. In addition, most cards charge a 3% balance transfer fee, and often there are times the cards with 0% intro rates require the borrower to have very high credit scores.


401(k) Loans

Many retirement plans allow borrowing on a 401(k) plan, with some rules attached. This type of borrowing requires a credit check, triggers tax penalties and requires talking to your company plan administrator. Rules on borrowing can involve payroll deductions, repayment terms, and limits on borrowing a percentage of what is already vested. To borrow on a 401(k) plan, talk to your company about terms and repayment options.


Home Equity Loans

A Home Equity Line of Credit (HELOC) is a loan secured by the equity in your home and can be used like a debt consolidation loan to pay off debt on higher-interest loans. A HELOC is given by a bank, credit union, or a mortgage broker and has low and stable interest rates with a balance repaid monthly. The interest on a HELOC is often tax deductible, though it puts your house at risk if you default on the loan. These types of loans are best for those with significant equity in their home, and for those who have   homes that have appreciated in value.


Credit Counseling

A debt management company can help those with low income negotiate with creditors for better terms on loans, a plan that may include lowering interest rates. This plan requires you to stop using credit cards, and pay one monthly fee (with no minimum) to the credit counseling service, which is then distributed among creditors, paying off your debt in 3-5 years. Credit counseling does not affect your credit score and consolidates debt without taking out another loan. Non-profit debt management companies are available but require you to bring in enough income to cover your expenses.


Personal Loan

Personal Loans are a form of ‘unsecured’ debt because they are not backed by collateral. This means that no property or valuables are forfeited to the lender in the event of default. The money is loaned by a bank or credit union and repaid within a well-defined term. With one monthly payment, these types of loans are best for those who look for a methodical approach to erase debt. When searching for a personal loan, those with higher credit scores will find lower rates and a 3-5 year repayment term. By using an online lender, you can often prequalify for loans without affecting your credit score. Additionally, online lenders don’t charge fees if you pay your loan off early, so if you are ahead of the payment schedule, you can continue paying stress-free.  If you default on a personal loan, you will not lose anything. However, a lien would be placed on wages.


Start the new year off right by making a promise to live a more financially stable life, starting with consolidating your debt. To find the type of loan that is right for you, explore your options and make an educated decision based on your needs. Credit Direct is here to help you find the best loan that will lead you to financial freedom in a short amount of time.


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