The short answer of what it means to consolidate debt is to bundle all or a portion of your current outstanding debt load and combine the balances owed and reduce the interest rate to on all of them to come up with a single payment that should be far less that all of the payments that were due combined.
Should you consolidate debt?
That is a great question that does not have a simple yes or no answer. When you consolidate your debt it may end up being a positive or a negative depending on how you look at it. If your sole objective is to lower your monthly payments overall then stay tuned because this article could literally save you money.
How to consolidate debt?
Here we will explore 3 ways to consolidate your debt.
1. Cash – Out refinance on your home.
If your credit and employment are acceptable and you have significant amount of equity in your home you may be able to “pull” some of that equity out to pay off your other higher interest debts with a much lower interest debt. The debt does not go away but the difference in paying a high 18% vs. 3.75% can be very substantial and you may be able to deduct that new lower interest payment from your yearly taxes.
2. Debt Management Plan
Another approach is to consolidate your debt with a debt management plan. A debt management plan will basically take your higher interest accounts and combine the balances and lower the interest on all of them. That is how they will come up with a lower payment and about a 5 year time horizon to have the debts paid off.
3. Deal directly with your creditors
Not many people want to negotiate with their creditors but in these tough times a lot of creditors are understanding and at the end of the day they would rather get something than nothing. Remember you have the pull pin of activating a bankruptcy that could find your creditors receiving nothing. So, if you don’t have equity in your home or meet the lenders credit and employment requirements or you don’t want to hire a 3rd party company to do the same thing you could do then dealing directly with your creditors may be the best way to consolidate you debt.
One thing to keep in mind is that it is important to be cautious and disciplined with your finances after you’ve done any of these methods because a little monthly relief shouldn’t be a sign to go spend more money than you have and go even deeper in to debt.