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if you owe money on your credit cards, you may be looking for solutions to get rid of that high-interest debt. This makes sense, especially in the current economic landscape, in which interest rates are high i persistent inflation it's putting a strain on many people's budgets. And, right now, the average credit card rate is over 21%, so between the compound interest charges and the higher costs of consumer goods, most people have to get rid of 'this type of debt.
In turn, you may be thinking about removing it a debt consolidation loanwhich, in many cases, can be a smart solution get rid of high rate debt. These types of loans can simplify your finances by combining multiple debts into a single monthly payment. And they typically have lower interest rates compared to credit cards, so they can lower your interest costs, too.
However, debt consolidation loans are not the right solution for everyone. To begin with, you must apply and be approved for this type of loan, and not everyone will be eligible. And, there are risks, like taking on an even bigger debt load and damaging your credit if you miss payments. Fortunately, debt consolidation loans aren't your only option. In fact, there are several smart alternatives to help you regain control of your finances.
Learn more about your online debt relief options today.
5 Smart Alternatives to Debt Consolidation Loans
Here are some of the top debt consolidation loan alternatives to consider:
A debt management plan
A debt management plan is a formal agreement between you and your creditors to pay off your unsecured debts at reduced interest rates and fees. These plans are usually created and administered by credit counseling agencies or debt relief services.
With one debt management plan, you make a monthly payment to the debt relief company, which then distributes the money to your creditors. Creditors are often willing to approve these plans because they would rather receive a lower payment for what they owe than nothing if they do declare bankruptcy.
The downside is that a debt management plan can negatively affect you your credit score, at least initially, and most require you to close all of your credit card accounts. However, if you complete the plan successfully, it can help you improve your credit over time.
Ready to get rid of your high rate debt? Learn more about the debt relief solutions available here.
A home equity loan or HELOC
If you have accumulated important home heritageyou may be able to access it via a home loan oh Home Equity Line of Credit (HELOC). These secured loans usually offer much lower interest rates than credit cards or personal loans. And, right now, the average homeowner has it much heritage of the home, about $193,000 of which can be borrowed for debt consolidation or other purposes. So, if you're looking for an alternative to debt consolidation loans, now might be a good time to consider home equity.
The obvious risk is that your home serves as collateral, so you don't pay the home equity loan or HELOC could result in foreclosure. There are also quotas and closing costs consider. But between the average homeowner who has large amounts of equity and the low average interest rates these products offer, using a home equity loan or HELOC could make a lot of sense today.
A debt settlement program
with settlement of debts, you will negotiate with your creditors to accept a lump sum payment that is less than the total amount you owe. This option is usually reserved for those who are seriously delinquent on their debts and facing possible bankruptcy.
You can try to negotiate deals yourself or hire a debt settlement company to do it for you These companies will instruct you to stop making payments to your creditors and instead save funds in a dedicated account. Once you have accumulated enough money, they will try to reach settlement agreements with your creditors.
while settlement of debts can provide significant debt relief, carries risks. Your credit score will take a big hit, and you can owe taxes on any forgiven debt amount. Creditors are also under no obligation to accept your settlement offers.
A balance transfer credit card
If you have good to excellent credit, a balance transfer credit card can be a powerful tool for debt consolidation. These cards offer a 0% (or very low) APR promotional period, typically ranging from 12 to 21 months, on balances transferred from other lenders. This gives you a window of time to pay off your debt without worrying about interest, as long as you make your minimum payments on time.
However, many of these cards charge balance transfer fees, which can negate some of the savings you would have otherwise earned. The key is to find a card with no balance transfer fee or a low fee of around 3%. You should also have a plan to pay off the entire balance before the promotional APR expires and the regular APR begins.
A cash-out refinance
For homeowners with excellent credit, cash refinancing is another option to consolidate debt. This involves refinancing your current mortgage for more than you owe and taking the difference in cash to pay off other debts. Like home equity loans, your home serves as collateral for the debt. You will also pay closing costswhich can reach thousands of dollars.
And, a cash refund It may not make much sense in today's rate environment, where mortgage rates are high, and many homeowners have mortgage loans with very low rates. Therefore, refinancing to a mortgage loan with a higher rate than what you currently have will cost you much more in the long run.
In turn, one of the alternatives mentioned above might make more sense than a cash refund in today's economy.
The bottom line
No matter which debt consolidation alternative you choose, the key to long-term success is changing the overspending habits that caused your debt problems in the first place. Once you have a plan to deal with your high interest debt, you should work to create a budget, create an emergency fund and live within your means to avoid repeating the cycle of debt in the future.
