It can be scary to think about your financial future if you are currently feeling overwhelmed by mounting debt, numerous monthly payments and balances that won’t budge. It may feel like you can never escape this cycle, but there are a lot of options for moving toward a brighter financial future.
Debt consolidation — moving all or most of your debt to one place — can be a good way to start. The best option for consolidating debt depends on many factors including your total debt, debt history, income and credit score, and whether you have property, such as a car, that could be used to secure a loan. Some common options include:
1. Home equity loans
If you own your home and have equity in it, you can take a home equity loan or line of credit. The interest rates, which may be tax deductible, tend to be lower than other loan types, but often take 10 years to repay, and you risk losing your home if you can’t repay the loan.
2. Loans against retirement funds
If you have a 401(k)-retirement plan, you can take a loan against it. These loans typically last 5 years and don’t show up on your credit report. However, there are heavy penalties if you can’t repay it, and if your retirement plan is employer-based, you will have to pay it back very quickly if you quit or lose your job.
3. 0% credit card transfers
Some credit cards will offer new customers 0 percent interest on balance transfers from other cards. This option is more common among people with higher credit scores and fewer credit cards but can also be available to some with less-than-prime credit.Transfers are only useful to those with relatively low debt because you often have just 12 to 18 months to pay it all back before the interest rate increases substantially. Plus, a one-time fee (often something like 3 percent to 5 percent of the transfer amount) may be added to the total balance on your new card.
4. Personal loans
Personal loans are one of the most common ways to consolidate debt. There are two types of personal loans — secured and unsecured. A secured personal loan requires collateral — often your car. The benefits of a secured personal loan are that interest rates are lower, you will often be approved for more money and the payments each month are typically lower. If this is not an option, you can go with an unsecured personal loan. Interest rates on these types of loans vary based on creditworthiness and other factors. With personal loans, you have a fixed payment period such as 3 or 5 years, and you make one payment each month. This way, you know that when the loan ends, your original debt and the interest will be paid back. In fact, personal loans can improve your credit score moving forward, as long as you pay it back on time.
Debt consolidation can mean lower interest rates, fewer monthly payments to keep track of, fewer late fees and a final date for when it will be completely paid off. All of this can make your financial future feel a lot brighter.
Jay Levine, Chairman, OneMain Financial, [email protected]