Debt consolidation can ease financial stress because it transfers balances from multiple debts into one monthly payment. In addition, the new payment is often lower than the previous payments if the consolidation loan has a lower interest rate or a longer repayment period than the previous debts.
Credit Card Transfer
Individuals can transfer the balances from many credit cards onto just one credit card to consolidate the debt. For the most savings, use a credit card with a low interest rate or sign up for a new card with a very low introductory rate for balance transfers. However, most cards charge a transfer fee of 3 to 5 percent, so savings should outweigh the transfer fee.
Home Equity Loan
Homeowners who have built up some equity in the home can consolidate any type of debt with a home equity loan. This type of loan usually has a fixed interest rate that is much lower than credit card interest rates. However, homeowners should be careful to not build up more debt and impair their ability to make payments on the home equity loan. Missing payments could lead to foreclosure.
Home Equity Line of Credit
People who anticipate needing to borrow more in the future might be better off consolidating with a home equity line of credit instead of a home equity loan. The line of credit allows the borrower to initially consolidate debt and continue using the line of credit for further borrowing during the draw period.
Refinance Mortgage
Homeowners who are already planning to refinance a mortgage to get a lower interest rate can consider getting a cash-out refinance and using the cash to pay off other debts. This adds the balance of the debts to the mortgage and forces the homeowner to pay them off over a long period, though, which can be costly.
Personal Loan
Banks and credit unions offer personal loans that people can use for debt consolidation. Although these loans tend to have higher interest rates than home equity loans, they are unsecured, meaning that the borrower is not risking an asset.
401(k)
Many types of 401(k) accounts allow employees to borrow from their retirement accounts and pay the money back with interest to their accounts over five years. However, this can be risky because people who switch jobs are typically required to pay back the loan in full at that point.
Whole Life Insurance
Some whole life insurance plans allow holders to borrow from the plan. This type of consolidation loan is not very risky because you do not need to repay the loan. However, if you do not repay the loan, the amount of the outstanding loan is deducted from the amount given to the beneficiaries.
Business Loan
If you incurred the debts for business expenses, the business owner could apply for a business loan to consolidate the debts. If the business has built credit, this is a useful way to get debt out of the business owner's name and off the business owner's credit report.
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