Debt Consolidation – How to Get Out of the Debt Trap?

Loans are the best and, at the same time, worst financial tools for borrowers. They’re great when you need to take care of what to know about debt consolidation in an urgent financial need you don’t have money for. But when it’s time to pay, you find high interests reaching up to your neck.

This is when it gets tough to get out of this bog, sucking you in the more you try to get out. However, there’s something called Debt Consolidation that can rescue you from your debt problems if you’re willing to put in some work. Want to know how you can benefit from it? Read on to know everything.  As a shortcut, visit this page to understand home equity credit in detail.

Try Doing This First Before Consolidating Debt:

If you don’t know, debt consolidation is basically merging all your debts into one giant debt with lower interest. Before deciding on any of the approaches for doing so that we’re about to tell you, it’s important you’re at the right place in your debt payoff timeline to get the most out of the consolidation benefits. Your options may be limited at the start. Luckily, you can resolve credit card debt through debt settlement.

For instance, if your credit card is maxed out or the credit score has taken a hard hit due to accumulating debt, you might not qualify for some debt consolidation options. Or the consolidation loan’s terms may be very strict, even unfavourable.

So if your credit score is low right now, start paying your outstanding balances using the best standard practices like paying more than the bare minimum you owe and paying a little extra whenever possible.

This should give some boost to your credit score, and more debt consolidation options might become available. And if they’re already available, their terms may become more favourable, allowing you to get out of the debt trap more easily. That said, let’s see some of the most common options for consolidating your debt.

4 Working Approaches to Debt Consolidation

Card Balance Transfer

Many credit card companies offer balance transfer credit cards with promotional deals having very low or even zero percent of interest for a specific period – 12-18 months typically. After getting the card, you can transfer your high-interest debts to it for a small fee. Then you can pay off those debts within the promotional period to benefit from low or no interests.

So, for instance, if you’ve got five cards and each has $2000 debt with a 10% interest, you need to pay $10,000 plus $1000 interest = $11,000 in debt payments. Transferring these debts to your single card with 0% interest would mean you’ll save a few hundred dollars as the interest rate for paying loans early gets lower.

However, keep in mind, balance transfer laws have changed and become stricter since the 2020 Pandemic. So card issuers have pulled back some of their best offers for balance transfers or at least made the approval criteria stringent. Therefore, maintaining a good credit score will help you significantly.

Tip: Before you transfer the balance, make sure to have a solid payoff plan in place. If you delay the payments or are unable to pay, you may end up paying more than what you owe. Do your best to pay off everything before the end of the balance transfer card’s promotional period.

Taking Personal Loans:

Many lenders, including banks, offer debt consolidation loans allowing the debtor to pay off their outstanding debts with high interest rates and pay a single monthly payment to the new lender. The best part of this is a significant reduction in your interest rate.

Where the credit card interest rate ranges from 15% to 20%, the average personal loan interest rate is typically below 10% which means significant savings for you. The best part is, most of the time, the interest rate for personal loans are fixed as long as you make timely payments.

Keep in mind; the new loan may have higher monthly payments even if the interest rate is lower as the period of full payment might be shorter. So before taking out the personal loan, look at your financial position to ensure you can pay the monthly instalments on time.

Home Equity:

This one is among the most popular ways to consolidate debt if you’re a homeowner. You can use your home’s equity, which is the worth of your home minus your mortgage. You can take out what’s left and pay off the high-interest rate loans. Then, you’ll only be making a single payment against your home equity loan.

Now we know you’re wondering, what will happen to my ownership in the house? Well, just like a credit card, as you make payments to pay off the home equity loan, your stake in the home’s ownership will start replenishing, and once you’ve paid everything, you’ll get your ownership back to what it was before taking out the loan.

Just like other consolidation plans, home equity also has the benefit of lower interest rates. However, since it’s a secured loan (backed by a security – your home), it is riskier than unsecured loans because not paying the loan back can result in foreclosure.

But there’s no need to stress over this yet; a professional home equity creditor can help you come up with the best payment plan to ensure your property stays yours while you climb out of the debt trap.

Student Loan Program:

If you’re one of the thousands of students who didn’t sacrifice their studies because of financial problems and instead took out student loans, then this one is for you. Depending on how many outstanding loans you might have, you can consolidate them through a private lender, such as Earnest refinance, and pay off the new loan in monthly payments.

Just like other payment options, this one also has the benefit of having lower interest rates. So it’s a good approach to save some money if your existing student loans have very high interest rates.