Monthly loan repayment bills can be pretty overwhelming, especially towards the tail end of the month. Like critters, loan repayments can scatter everywhere, which proves an uphill task to quash all of them at once.
But with the right debt consolidation strategy, it is possible.
Many are going the debt consolidation way, where a single consolidation loan simultaneously pays off all the bills. Let’s look at why this strategy has proved to be quite helpful in repaying debts on time and the different ways you can consolidate your loan.
The Role of a Debt Consolidation Strategy
While there are various ways of debt consolidation, one may not be better than the other.
A debt consolidation strategy should combine the high-interest debts into a single lower interest. It should make monthly repayments affordable and eliminate debt within a shorter period.
Paying off the other debts and maintaining only one can reduce the monthly fees and interests. But some risks come from using this strategy. One such risk is that debt consolidation can make your financial situation shaky. Therefore, ensure you aren’t making too many sacrifices and avoid companies with too many promises that seem too good to be true.
Debt Consolidation Strategies
The three effective debt consolidation strategies include:
Personal Loan
A new personal loan from a financial institution is the most common method of consolidating your debt. This strategy involves taking a personal loan with a lower interest rate than the other bills and paying it back within 12 and 60 months. Interest rates will usually be fixed based on the borrowed amount and the credit score.
This enables you to save money by paying off the higher interest debts and lowering the monthly repayments.
Personal loans are unsecured, meaning that it’s not collateral-backed. Therefore, defaults don’t risk losing your asset like in secured debts such as mortgages. But your creditor can still sue for insolvency, and a lien may be placed on your house or other assets.
Advantages of Using a Personal Loan Strategy
- One comfortable monthly payment on an agreed date
- Option to choose the best from a large number of lenders
- Monthly payments that consistently reduce your overall debt
- The payments and interests are transparent and easy to understand
Cons
- Thorough vetting of the financial standing
- Higher interest rates for lower credit scores
- Many fail to qualify based on poor credit
Family and Friends
Borrowing from family and friends can be an effective method of consolidating your debts and paying them off in a scheduled manner.
However, this method depends on how comfortable you are asking for a loan and how close you are to the people with the financial capability to bail you out of your debt.
The lender must have the capability and willingness to help and not hurry to ask for their money back. You must enjoy a good relationship with the person, and they must not have a problem when you are late or default on some payments.
For this to work you can share the details about your debt, such as the amount of debt and the interest rates, repayment plans, and your budget with the friend. Also, ensure that you indicate your ability to pay and put it in writing.
Putting everything in writing shows commitment and acts as a good record in the future.
Pros
- Flexibility in payment
- Freedom from credit checks and endless applications
- No borrowing costs and fees
- Better credit score as your friends and family will not report you in case of a default
Cons
- May expose your financial troubles to family and friends
- You may lack the freedom to do something like spend on a holiday
- Defaults can cause strained relationships
A 401(k) Loan
Even though it’s not the best option, you can leverage your 401k plan to pay off your debt. There’ll be some rules to comply with for this option and credit caps, usually between 50 and 80% of the invested amount.
Payment is usually through payroll deductions within 2-5 years, and the loan typically has an interest of around 5%.
Pros
- Easy application and quick approval
- It does not require credit checks
- Money is available within two or so days
Cons
- Not the best idea to take money from your retirement plan
- Reduces the amount of your retirement money, and this translates to reduced interest earned
- You may have to pay fees and taxes on the amount remaining when you leave your employer
There are undoubtedly various debt consolidation methods, but the best among them must accommodate your financial situation and pay off the debt within the shortest period possible. Consider debt counseling if you’re having trouble containing your bills.
