A complete guide on how to consolidate your debt

consolidate your debt

Are you struggling under the weight of debt? Are your loan balances spread across multiple different lenders, institutions, or credit cards? If so, it might be a great idea for you to consolidate your debt. Doing so could not only save you a ton of money but can save you a ton of headaches as well.

Debt consolidation is one of the most powerful strategies available to those who want to simplify their personal finances and start making positive changes in their situation.

If you have goals of being debt-free in the future, which you should, one of your first steps is consolidating and simplifying your debt.

Wondering what debt consolidation is, and how to make it happen? Keep reading our debt consolidation guide below.

Consolidate your debt

What does consolidate your debt mean?

If you have multiple types of debt, ranging from personal loans to auto loans, credit cards to medical bills, it can be overwhelming to manage them all. They have different due dates, different websites to log into, and different interest rates.

Not only can it be hard to pay them all back on time, but it can be costing you a lot of money in high-interest rates.

Debt consolidation is the process of combining all of your different debts into one loan. Basically, you’ll get a new loan, pay off all of the individual loans, and only have to manage one monthly payment and interest rate.

Wondering if you should consolidate all of your debts? Consider these benefits.

Benefits of debt consolidation

Debt consolidation has the power to save you money. Say you have a few open credit cards, each of which you are paying about 16% interest on, as that’s the national average.

That’s a lot of money you are having to spend on interest each month, which eats into the amount you are actually paying down on your debt. By consolidating your debt into one type of loan, you can potentially lower your interest rate to somewhere between 6% and 12% instead.

On top of a lower interest rate, debt consolidation puts all of your payments together. Rather than having to remember to make multiple payments on multiple different websites, you only need to make one payment.

This decreases your chance of missing a payment and having to pay a late fee. Also, missing payments can destroy your credit score, preventing you from getting any new loans in the future.

Having only one payment to manage frees up mental space. It’s much less stressful as it feels much more manageable and much more likely to actually pay it off and eventually live debt-free.

Debt consolidation strategies

Now that you know why debt consolidation is so powerful, it’s time to figure out how to do it. There are many different options. Regardless of your unique situation, you’ll find at least one option that can work for you.

Debt consolidation loan

One of the first methods to consider is a debt consolidation loan. Not all lenders offer a loan under this title, but many online lenders and local banks do.

These essentially act as a personal loan, but they are specifically intended to pay off all of your other loans, replacing them with this loan. In order to qualify for one, you’ll need to list all of your debt balances on your application.

If approved, you’ll receive enough money to pay off all your existing loans, but probably not any extra. Check to see if you qualify for a Plenti loan today, as they are one of the leading lenders when it comes to fast and easy debt consolidation.

Personal loan

Personal loans are very similar to debt consolidation loans. However, most, if not all, lenders offer personal loans. So if you have a preferred lender, such as your local bank or credit union, you can probably get a loan from them to consolidate your debt.

Your existing bank would love to service you by providing you with a loan. They may offer favorable terms or interest rates as a result of staying loyal to them. Even if your local lender doesn’t offer debt consolidation loans, be sure to check out their personal loan terms and compare them with other options.

Using home equity

If you own your home, there’s a good chance you have equity in it. If you do, it’s probably sitting there doing nothing to serve you.

Instead of letting it sit by idly, you can put your equity to work. By borrowing against your home equity, you are essentially borrowing from yourself. This can be one of the most cost-effective strategies for consolidating and paying off debt.

One way to tap into home equity is with a home equity loan. These act as a lump sum payment, similar to a personal loan. As soon as you receive the loan, you’ll begin making payments until you’ve paid your equity back.

The other equity option is a HELOC, or home equity line of credit. These act as a revolving line of credit against your home equity, similar to that of a credit card.

You only borrow when you need to, and only pay back what you use. Once it’s paid back, you can continue borrowing and paying it back over the life of your HELOC, which is typically 10 years.

The benefit of using home equity is that the loans are secured by your house. This means much lower interest rates than credit cards and unsecured personal loans.

The risk, on the other hand, is that by failing to make your payments, you could end up losing your house. However, lenders would prefer not to reclaim your home and are almost always willing to work with you if you are struggling to make payments.

Refinancing your home

Don’t want to deal with a loan against your home equity? You can cash it out instead.

By performing a cash-out refinance, you’ll get a new, higher mortgage to replace your existing mortgage. You can pull out as much equity as you want, though lenders generally want you to leave 20% in the home still.

So if your home is valued at $300,000 and your loan balance is $150,000, you could get a new mortgage for $300,000, leaving 20% in the home (or $60,000), and pulling out $90,000 in cash.

The benefit of this approach is that you are essentially combining all of your debt into your mortgage payments. These are the lowest rates you’re going to get, often 5% or lower.

The downside is that you are increasing your mortgage balance and resetting your mortgage calendar to another 30 years. It can be an effective strategy but weigh the cons against the pros.

Balance transfer credit card

Do you have multiple credit cards open, each holding a balance? One effective strategy could be applying for a balance transfer credit card. These exist solely to combine other credit card balances together.

They often offer an introductory, interest-free period ranging anywhere from six to 18 months. Therefore, this strategy is especially appealing if you think you can pay off your balance in that timeframe.

Even if you can’t, it’s a strategy worth considering. Only having to make one credit card payment each month is much less of a hassle than dealing with multiple cards.

The only issue is that there is usually a fee associated with transferring a balance. This fee can range from 1% to 5% of the total balance being transferred.

Borrow from a relative

If all else fails, you could always try borrowing money from a relative. If you have any rich uncles or parents with extra cash, they could be looking for a way to earn interest.

By lending money to you, they could easily earn between 5% and 10% interest, as opposed to the sub-1% they would earn by putting it into a savings account.

Of course, borrowing money from relatives can become messy if aren’t confident in your ability to pay it back. Don’t bother asking if you change jobs frequently or have poor spending habits.

If you do want this strategy to work, make sure you have a solid job that you plan on staying on for a long time. Set up a budget ahead of time, as no one wants to lend to someone who doesn’t have a budget and self-control.

Debt consolidation companies

There are some companies and non-profit organizations that exist to help people create a debt management plan. Rather than combining all of your debts into one loan, they simply combine all of your payments into one.

That means, you’ll make one monthly payment to the organization, which will then distribute those funds to all of your various lenders. This can help you manage your monthly payments much more effectively so that you stop missing your payments and ruining your credit score.

They can also provide coaching and budgeting help to help you feel confident managing your finances.

Consolidate your debt today

When it comes to your personal finances, your dreams of the future, and your current debt payments, there’s no time to waste. If you could start saving money and living a less stressful life, you could improve your life today while also setting a positive course for the future.

You should consolidate your debt as soon as possible. It’s such a powerful strategy that can work to set you free, financially and mentally.

Looking for more articles like this? Check out the rest of our blog today to keep reading.

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Essential finance tips for Canadians living in debt

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