Best Debt Consolidation Options of 2020
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Juggling debt from multiple sources can make your finances seem like the world’s biggest puzzle.
Debt consolidation can help organize those debts and monthly payments into something much more manageable. By streamlining your debts from different credit cards or lenders into one consolidated payment, especially if you get a lower interest rate in the process, you can jumpstart your debt repayment success.
However, you need to be strategic about how you implement consolidation into your repayment plan. Choose a consolidation option that works with your credit score, matches your timeline and goals, and will help you build healthy, lasting financial habits.
Choosing the right time to consolidate
Before choosing a consolidation method, make sure that you are at the right point in your debt repayment process to get the most out of the benefits. If you are just starting out, your options may be limited.
“Often times, if someone has peaked or their credit has been affected, it can be difficult to qualify for many options,” says Katie Bossler, financial expert and quality assurance specialist at Greenpath Financial Wellness, a national non-profit organization that provides financial advisory services. “Or the conditions may not be favorable.”
This is even more common as lending standards change in response to the economic downturn. Lenders and creditors reduce their own risk by being more selective about who they offer these options to, and even more about who is eligible on the most advantageous terms.
If your credit isn’t good today, start paying off your balances using standard best practices: pay more than the minimum amount owed, and start making additional payments when possible.
“As you pay off your debt, your credit will likely increase, so these options may become available or be more favorable,” Bossler explains. Once you are further along in the repayment process and improve your score through factors like your positive payment history and low credit usage, your consolidation options may improve.
You should also consider the types of debt you want to consolidate and how you might approach your options differently. For example, credit card balances and high interest personal loans can be bundled together, but you usually only need to bundle student loans with other student loans.
When you’re ready to consolidate, here are a few options to consider:
Balance Transfer Credit Cards
Balance transfer cards offer introductory zero percent interest periods, typically between 12 and 18 months. After opening the card, you can transfer other high interest debt balances for a fee and pay them off throughout the introductory period. Since you don’t earn interest, each payment will go directly to principal.
Jordanne Wells of WiseMoneyWomen spent much of 2019 paying off $ 30,000 in credit card debt. She started by changing behaviors, like adopting a strict budget, making regular additional payments, and automating her payment schedule.
But Wells, 34, says consolidating the balances of his best cards onto a single balance transfer card was a key part of eliminating his debt.
“Instead of having five or six different cards that I paid off, it was just one big card. I could just hit it up and do it.
But like everything else in 2020, balance transfers get complicated. The issuers not only pulled many of their best balance transfer deals, but they also tightened lending standards so that available cards are more difficult to obtain without great credit.
Whichever method of consolidation you choose, be sure to save money by shifting your high interest debt to an option with a lower APR. In the course of paying off your debt, even a few percentage points of interest could represent huge savings.
If you can qualify, always make sure you have a repayment plan in place before transferring your balance to a new credit card. If you are not able to pay off a substantial portion of your balance during the introductory period, you will only prolong your debt and may even pay more in the long run. In fact, some issuers charge interest retroactively back to the day you transferred your balance if you don’t pay the balance in full by the end of your introductory period.
Like a balance transfer, consolidation through a personal loan can help simplify your debt repayment by combining your debts into one standard monthly payment.
The best part? You can drastically reduce your interest. While credit card interest rates average around 16%, average personal loan rates are below 10%, according to the Federal Reserve (although terms vary, with the best rates going to those who have the best credit). And because personal loan rates are often fixed, you don’t have to worry about how your rate may fluctuate over time.
Prepare to be proactive with paying off your debt if you choose a personal loan. Depending on the length of your repayment period, the amount you owe each month could be more than the minimum payment you are used to paying on your credit cards, even taking into account the lower interest rate.
Before taking out a new loan, always make sure that the repayment schedule matches what you are able to pay. Also do your research to find a lender willing to extend an interest rate lower than your current APR; you can get an interest rate as low as 6% through some of the best personal loan deals today.
If you are a homeowner, you may be able to use your home equity (the home’s value minus what you owe) as a tool for consolidation, through a home equity loan or home equity loan. ” Home equity line of credit (HELOC).
With a home equity loan, you can take out a lump sum, use it to pay off your high interest debt, and then pay off the loan in standard monthly installments. A home equity line of credit acts more like a credit card; you can borrow from the line of credit as needed to pay off your other debts, then pay off the HELOC over time.
Like other consolidation methods, the best reason to consolidate by home equity is to get a lower interest rate (loans can be fixed, while HELOCs are often variable). Secured loans like these can also be more viable options for homeowners without great credit, as other consolidation methods generally require a good credit history.
But a home equity loan or HELOC can be risky. Because these are secured loans, by using your home as collateral, you could risk foreclosure if you don’t pay. And since home equity loans are based on the value of your home, you could also risk owing more if your home’s value goes down.
Debt management plan
If other consolidation options don’t work, or if you’re really overwhelmed with debt balances, consider working with a nonprofit credit counselor on a debt management plan. These plans are designed to consolidate and reduce your monthly payments, whether your debt is from credit cards, personal loans, or even collection debt.
Always look for credible, nonprofit credit counseling agencies such as those approved by the National Foundation for Credit Counseling.
Credit counselors can help you negotiate the terms of your debt, lowering your interest rate and lowering your minimum monthly payments, often based on your discretionary income and the payments you are able to make each month. . This can be a particularly useful option if you want to start paying off your debt, but are facing a period of financial hardship.
“When you participate in a debt management program, you have this monthly payment and you know the debt will be paid off within that period of time,” Bossler says. Taking the pressure off of arranging payments to different lenders on different dates throughout the month allows you to focus on the other details that will help you be successful in paying off your debts, like streamlining your budget and cutting expenses.
Debt consolidation can be a great tool for paying off debt, but you have to be smart about how you go about implementing it. Take the time to study the different types of debt you have and how the different consolidation options can best match what you are able to pay, your deadline, and your other financial goals.
“When you go through all of these things, there isn’t necessarily a right or wrong answer,” Bossler says. “It’s just a matter of weighing the options available to you. Really understand the terms, the interest rates, what you’re actually getting into before you get started.