Debt consolidation, also known as debt management, is a way of combining all your credit accounts into one, meaning one payment to one company every month. Besides simplifying your debt, debt consolidation eliminates multiple finance charges, and often offers lower interest rates, meaning a lower monthly payment.
According to an accounting outsourcing firm in UK, there are different kinds of debt consolidations that an individual can opt for to simplify the debt and enjoying reduced monthly payment.
What kinds of debt consolidation are there?
1. Balance Transfer
A balance transfer is simply transferring the balances of all your credit accounts to one credit card. Often, if this is a new credit card, there will be an introductory period in which there is no interest charged on the balance transferred. If you don’t have the option of opening a new credit card account, you could transfer your high rate balances to a lower rate card, which will save money in the long run. Before going through with a balance transfer, make sure that there are no extra fees that could eat up potential savings.
2. Home Equity Loan or Line of Credit
A home equity loan is a loan for a set amount of money that is to be paid back over a pre-determined amount of time, while a home equity line of credit is an open-ended amount that you can borrow at any given time, similar to the credit limit on a credit card. Both are borrowed against the equity in your home, and offer low interest rates. Be careful with this option, however, as defaulting on these types of loans could mean foreclosure.
3. Debt Consolidation Loan
This is a loan from a bank or debt consolidation company that is used to pay all your balances. Instead of having multiple balances on different accounts, you’ll just be paying the debt consolidation loan. These types of loans may charge loan origination fees and monthly service fees, so read the fine print before applying.
4. Borrowing Against Life Insurance or Retirement
This is the least advised method of consolidating debt. For life insurance, you can borrow up to the cash amount of the policy. You don’t necessarily have to make payments on the loan, but it means there will be no death benefit to pay your final expenses when you die.
Borrowing against retirement requires you to pay the loan back within five years, or you’ll face penalties and taxes. If you lose or leave your job, the loan must be paid back within 60 days, or you’ll face the same penalties.