When it comes to paying down debt, you need a good strategy. Without a plan, your efforts to pay off debt can fall flat, and it can take quite a long time to realize your goal of getting rid of debt. One of the strategies that you can employ to pay off your debt is loan consolidation.
What is Debt Consolidation?
When you consolidate your debt, you essentially take a larger loan, and use that to pay off your smaller loans. So, if you have three loans you are trying to pay off, of $1,000, $800 and $2,400, you would get one debt consolidation loan of $4,200. Then you would use that money to pay of the other three loans.
Instead of making three different payments, with three different interest rates, you now only have one loan payment to make -- and one interest rate. Often, that one interest rate will save you money, since it usually results in paying less in interest than you would pay on three individual loans with (usually) higher rates.
How do You Consolidate Debt?
There are different options when it comes to debt consolidation. One of the more popular methods, especially if the debt to be consolidated is a relatively small amount, is the use of a credit card balance transfer. You can apply for a low interest credit card, and then transfer the balances from your high interest cards. That way, you have a lower interest rate, and that helps you pay down debt faster as more of your monthly payment goes toward principle.
You can also get a special debt consolidation loan. If you have reasonably good credit, and if you are a good customer at a bank, you might be able to get a personal loan for debt consolidation purposes. There are also opportunities to get personal loans for debt consolidation when you take advantage of P2P lending web sites.
Another option is a home equity loan. You can tap the equity in your home to help you pay off your credit cards debts. Often, you can get a lower interest rate, since the loan is secured with a huge asset -- your house. However, you need to be careful when you get a home equity loan to consolidate your debt. Once you take your unsecured debt and secure it with your home, you are now at risk of foreclosure if you can't keep up with payments on your home equity loan. Think carefully before you put your home at risk to pay off credit card debt.
Bottom Line
Debt consolidation can be one way to make paying off your credit card debt a little easier. Some of the best Canadian credit cards offer low interest options so that you can consolidate your debt at a relatively low interest rate to pay off your debt quicker. There are also other options that can help you. Being able to make one payment, at one lower interest rate can help you speed up the debt pay down process, as well as make it more manageable all around.
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This post was included in the Carnival of Personal Finance at Stumble Forward.
Hi Janet,
We receive many inquiries from consumers with debt and so I found this article interesting!