How to Consolidate Your Debt

Are there ways to consolidate debt?

If you continually fret about debt -- it's time to seek solutions. There are several methods for solving debt problems. First, admit you have a debt problem. Then, find the best way to resolve your debt issues. Solutions include paying down debt with payments you can afford, consolidating or transferring debt, and/or negotiating interest, balances or due dates.
Negotiate with Your Creditors

If you are dealing with a short-term debt problem, negotiate with your creditors to reduce your monthly payments. This will give you the breathing space you need to get past a short-term credit crunch.

Transfer Your Balances to a Lower-Interest Credit Card

Transferring balances from one or more credit cards to a lower-rate card makes sense ONLY if the rate of the new card is a fixed lower rate, or you can pay off your outstanding debt within the time frame of the low introductory rate. If the lower rate only lasts for six months or a year, and you can’t pay off the debt in that time, it doesn’t really make sense to transfer it unless the rate you will have after the low introductory rate is still lower than the rates on the cards you currently have. Read the terms of the new credit card carefully. You don’t want to get stuck with a significantly higher interest rate in 6 to 12 months – that defeats the purpose of the transfer.
Get a Home Equity Loan

Consider a home equity loan line-of-credit if you own your own home and have some equity that's built up over the years. These types of loans are inexpensive, relatively easy to obtain and may offer a tax deduction for the interest portion of the loan. Remember, however, that you are using your home as collateral for the loan. If you default on the loan, you could lose your home. A home equity loan can be an exceptionally useful tactic to repay higher-interest debt if it's used properly, but you need to understand the consequences of defaulting on that loan.
It’s also important to avoid the trap many people fall into when they’ve paid off their debts with a loan like this. You can NOT rebuild your debt on the cards or other higher-interest loans you’ve paid off. You’ll end up with the home equity loan to repay, plus all the new debt you’ve accrued on the credit cards, digging yourself deeper into the debt hole. To truly reduce your debt, stop spending and pay off your home equity loan as quickly as possible.

Borrow from Your Retirement Funds

If you have no other choice, consider this option. Most employers will allow loans from a 401(k) or other retirement plan, which are typically limited to 50% of the assets in your plan, up to a maximum of $50,000. Interest rates on these loans are customarily quite appealing to most consumers.

While accessing retirement funds does offer a solution to speeding up your debt repayment plan and lowering your monthly payments, there are disadvantages. The interest you will pay for the loan is almost never tax-deductible. Additionally, you must repay this loan in five years or less, or the IRS will assess taxes and penalties which you will be responsible for paying. And, if you quit your job, your employer will require the loan be paid in full before you leave.

Borrow against Your Life insurance

On most types of life insurance policies, you can borrow against the value of the policy. The interest rate usually falls well below commercial rates, and you can take your time repaying the loan, since there’s no time limit set. However, if the loan is not paid in full before you die, it will be deducted from the policy amount, which will reduce what your beneficiaries will receive.
Borrow from Family and Friends.

If you can borrow money from your relatives, it could be the solution to your financial crisis. Friends and family often charge very low interest, or even no interest. Paying extremely low or no interest can save you a great deal of money.

Remember, however, that borrowing from you family or friends could be a great way to wreck a relationship. To maintain the relationship and protect you and the person who is loaning you the money, it's best to treat the transaction just as you would with a bank or other lender. Keep things on the straight and narrow; use a written agreement outlining what is due and when. Clearly establish the interest and repayment schedule in writing to avoid misunderstandings and hard feelings. You might even want to have the document notarized. Most importantly, be scrupulous about adhering to that repayment schedule.

Borrow from Your Credit Union.

Credit unions commonly offer lower interest rates and fees on loans. If you're not a member of a credit union, check with your employer, family members or organizations to which you belong to see if you're eligible to join one. There are credit unions operating nationally that are open to the public and don’t require that you have an affiliation with other organizations to join.

Nonprofit Consumer Credit Counseling Agency

Most financial and credit experts agree that this should actually be your first step. As experts in helping consumers get out of debt, nonprofit consumer credit counseling agencies work with creditors regularly to get late fees waived and interest rates reduced. You can be assured that most counseling agencies have heard and dealt with all kinds of financial situations. Rarely will a situation shock them. Usually, you will pay the agency a single fixed monthly amount, which the agency then divvies up and pays to your creditors. It makes it easier for you to keep track of what you need to pay each month, forces you to change your spending habits, and is a real solution for the person who is serious about getting out of debt.

Renegotiate the terms with your primary lender

Mortgage lenders would much rather renegotiate the terms of a loan than repossess someone’s home. If you are straightforward with your lender, admit that you are behind, and ask the lender to stretch out the payments, you may be pleasantly surprised. Remember, lenders do lose money if you default, so it is in their interest as well to renegotiate loan terms