Options for Consolidating Personal Debt
Credit Cards, Consolidation Loans, & Home Equity Lines of Credit
There are many options available now for individuals who are in debt. Credit cards with low introductory percentage rates, debt consolidation loans or lines of credit, and home equity loans are the most common. Depending on the specific situation of the person in debt, one or more of these may be a viable option to getting out of debt and saving money on interest.
Balance Transfer Credit Cards
The first option is a credit card with a low introductory annual percentage rate. The advantage is that this would allow the consumer to consolidate current balances onto one card with a very low (possibly zero) percentage rate and make less payments in interest in the short term. However, these rates are introductory and do expire. When the rate expires, the interest will increase to close to or higher than what was being paid before.
There is usually a transaction fee for transferring these balances over to the credit card as well which is generally around 3-4% of the amount being transferred. If the consumer has the ability to pay off the loan in six months to a year (the usual length of time for the introductory rate) then this could be a good option for them. If not, then they will be back where they started to begin with.
Personal Loan or Credit Line
Another option would be a debt consolidation loan or line of credit. Keep in mind, this is not a debt consolidation program, it’s an actual line that gives the individual the ability to pay off debt but it will not remove any of the current debt. This allows them to put all of their balances onto one monthly payment, with one interest rate and one creditor to pay back. Typically these are for higher credit lines than credit cards so it would be more likely that they would be able to consolidate all of their debt rather than part of it.
There usually isn’t an introductory rate so the consumer will start at a higher APR to begin with and there usually is still a transaction fee. However, with loans there is a set term. On a credit card, the minimum payments are structured in such a way that consumers are mostly paying interest and very little principal. With a loan however, they are paying both interest and principal so that they know how long it will take to pay off the debt. Also, many of these options do not have any prepayment penalties, so they could still always have the option of paying the debt off sooner.
Home Equity
The last option discussed in this article is a home equity loan. Typically the interest on these loans is lower than consolidation loans or lines of credit. However, there still is usually a transaction fee and the home will need to be used as collateral.
There often are other fees associated with home equity loans as well, such as an appraisal fee on the home before the bank will accept it as collateral. This may be an option if the individual's credit isn’t good enough to qualify for another credit card or consolidation loan and if they know their finances won’t change while the loan is being paid off. If they do lose income and cannot make the payments, they risk losing their home.
These are just a few of the many options available to individuals suffering from debt. Credit cards, consolidation loans, and home equity loans all have pros and cons to them and it will depend on the individual’s specific needs to determine what is right for them.
Sources and Further Reading:
Debt Elimination Programs: Possible Scams Considered as Options to Consolidate Debt by Tiffany Krey at Suite101
Debt Consolidation: cure or continued credit problems? by Jenny McCune at BankRate.com
Money Available for Debt Consolidation
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