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11 Debt Consolidation Tips for the Serious Financial Consumer
Americans have an eye on using personal loans to consolidate debt – it’s the second-most popular reason to take out a personal loan, behind home improvements, according to an Ipsos/Forbes Advisor study .
“Debt as a whole can be overwhelming for people—especially if it occurs through many sources,” said Dan Morse, area manager at Arizona-based Waterstone Mortgage. “People are wrestling with decisions on which bills to pay with limited resources. It can impact mood and relationships negatively.”
Consolidating many different bills to one larger monthly bill can make debt more manageable. “Depending on the rate and term used to consolidate the debt—it could also save money in the long run,” Morse said.
11 Tips to Consolidate Debt
If you’re looking to consolidate personal data, no matter what the reason, the trick is to do the job using the best tools possible. That will get you the most optimal results in the shortest amount of time.
Fortunately, personal finance experts have no shortage of tips and strategies to consolidate debt in the most efficient manner possible.
Here’s a closer look at 11 of their best debt consolidation ideas.
Cash out refinancing. A mortgage is an example of a way to consolidate debt – especially a cash-out refinance loan.
“A cash out refinance takes your existing mortgage and gives you money to pay off other debt, renovate your home, or just have cash on hand for whatever purpose you wish,” Morse said. “With a cash out refinance, you have one payment amortized over 30 years. That means you can lower your overall expenses drastically.”
Home equity line of credit. A home equity line of credit (HELOC) is a way to keep your first mortgage intact and consolidate into a second mortgage.
RELATED: Cash Out Refinancing Versus Home Equity Loan
“The advantage here is you may have a lower rate than your combined debt,” Morse noted. “The HELOC allows you to pay as much as you can, while knowing you can pull money from the loan if an emergency were to pop up.”
Get a personal loan. If your debt consolidation motivation is improving your credit, a personal loan is a great way to pay off credit cards or lines of credit.
RELATED: Taking a Debt Consolidation Loan? Consider These Factors First
“If your end goal is buying property or a vehicle, a personal loan to consolidate debt is a critical means to an end,” said Julie Aragon, founder at Julie Aragon Lending Team in Santa Monica, Ca.
Borrow from a Life Insurance Policy. Try a “do-it-yourself” debt consolidation strategy and borrow from your life insurance policy. “This move can free up cash from other resources and assets to pay down other debt, thus consolidating your debt,” Aragon said.
Borrow from your retirement fund. Aragon said this strategy can also free up money fast, but do your best to pay it back to keep your long-term financial health in good shape.
Use a balance transfer credit card. If you have high credit card debt, an effective way to consolidate it is with a balance transfer credit card.
“Read the fine print on the credit card’s policies so you can better plan to pay off your debt by the end of the no-interest introductory period,” advised Karen Condor, personal debt expert at Loans.org. “Just know the remaining balance will be subject to a regular credit card interest rate.”
RELATED: How to Consolidate Credit Card Debt
Make a list of all your debts before you consolidate. Jot down a debt consolidation “to do” list that includes the following information, said John T. McFie, investment advisor representative at Wealth Team LLC, in Las Vegas, Nev.
- Requirement Monthly Payment
- Interest Rate
- Time left to payoff
- Calculate: Required Monthly Payment / Balance = Cash Flow ratio
That’s the key information you need to know before properly consolidating debt.
Snowball or avalanche. Next, focus on one debt at a time and consider the following options:
“Paying off a debt with a low balance will free up cash flow to pay off other debts,” McFie said. “Choosing the lowest balance as your top priority is usually considered the “snowball” debt payoff method. Choosing the highest interest rate as a top priority (called the “avalanche” method) will save the most interest mathematically, but cash flow will not be as flexible.”
“Consider using a combination of these methods and consolidating similar debts,” McFie added.
RELATED: Credit Card Debt Snowball Versus Debt Avalanche Payment Models: Which is Better?
Freeze your higher-debt credit cards. “If you go the debt consolidation loan route, put your cards in a Tupperware container, fill it up with water, and throw it in the freezer,” said Victor Vega, New Jersey-based life insurance firm. “Just save the credit card with the smallest balance. This way you don’t run your credit cards up after they’re paid off.”
Pay more on your debt. “When in debt settlement mode, aim to overpay your monthly payment as often as possible to settle your debt faster,” Vega said. “This will help you avoid legal troubles that may happen with debt settlement.”
Widen the playing field. Above all else, if you’re interested in debt consolidation through any debt relief company, take some time to examine all your options.
“Try to get quotes from several companies, including credit unions, online banks, and other lenders,” said Lyle Solomon, an attorney at Oak View Loan Group, in Rocklin, Cal. “And make sure to compare interest rates, fees, and terms before finalizing your decision.”
Brian O'Connell has been a finance writer at TheStreet, TheBalance, LendingTree, CBS, CNBC, WSJ, US News and others, where he shares his expertise in personal finance, credit and debt. A published author and former trader, his byline has appeared in dozens of top-tier national publications.