In a lot of cases, this may be decided by your lender, who may choose the order in which creditors are repaid. If not, pay off your highest-interest debt first. Debt consolidation refinance: How it works, pros and cons .... However, if you have a lower-interest loan that is causing you more emotional and mental stress than the higher-interest ones (such a personal loan that has strained family relations), you may want to start with that one instead.
Examples of Debt Consolidation Say you have three credit cards and owe a total of $20,000 at a 22. 99% annual rate compounded monthly. You would need to pay $1,047. 37 a month for 24 months to bring the balances down to zero. This works out to $5,136. 88 paid in interest alone over time.
16 a month for 24 months to bring the balance to zero. This works out to paying $2,371. 84 in interest. The monthly savings would be $115. 21, and a savings of $2,765. 04 over the life of the loan. Even if the monthly payment stays the same, you can still come out ahead by streamlining your loans.
73($1,813. 91*3) $1,820. 22($606. 74*3) $20,441. 73 $16,820. 22 However, if you transfer the balances of those three cards into one consolidated loan at a more reasonable 12% interest rate and you continue to repay the loan with the same $750 a month, you'll pay roughly one-third of the interest—$1,820.
This amounts to a total savings of $7,371. 51—$3,750 for payments and $3,621. 51 in interest.
There are several avenues open to consolidate debt, including a debt management plan; home equity loan; personal loan; credit card balance transfer; borrowing from a savings/retirement account and debt settlement. The route you choose should be based on research and whether the solution offered fits your budget and time frame.
Debt Management Plan, The goal of a debt management plan is to reduce the interest rate you pay, lower the monthly payments and eliminate debt in 3-5 years. These plans are offered by nonprofit credit counseling agencies, who receive concessions on interest rates from credit card companies to arrive at an affordable monthly payment for the consumer - Consolidate Debt: Home Equity Loan, Mortgage Refinance ....
Personal Loan, This is a form of consolidation loan that could come from a bank, credit union, peer-to-peer lender or maybe even a family member or friend. Personal loans usually are unsecured, meaning the borrower doesn’t put up any collateral. That results in a higher interest rate and less money available for the loan because it’s a higher risk.
Debt Settlement, If you reach the desperation point with credit card debt, debt settlement might be the solution to your problem. With debt settlement, you (or a company you hire), negotiate with the card company to pay less than you owe, sometimes as much as 50% less. Debt settlement stops harassing phone calls from debt collectors and could keep you out of court.
You need to make a lump-sum payment to settle the debt and that could be difficult. There is also the matter of fees (if you hire a company), taxes (on amount forgiven) and severe damage to your credit score for seven years. Credit Card Balance Transfer, Most credit card companies offer a balance transfer card that is very attractive, but may not be available to you.
There usually is a transfer fee of 3%-5% of the balance transferred. That fee is added to your balance. You also must qualify for these cards with a healthy credit score, usually above 670. Also, if you have not paid off the balance by the time the introductory period ends, you will be charged standard interest rates.
Typically, banks allow you to borrow against 80% of the equity you have. So, if you have $50,000 in equity, you could borrow $40,000 to pay off credit cards. The interest rate you would pay would be considerably less than interest on your unsecured credit cards because you are offering your home as collateral.
There also are taxes on this. So, while it seems like a good idea, think hard before going after money in a 401k or savings account to pay off credit cards..
Track your debt the easy way, Sign up with Nerd, Wallet to see your debt breakdown and upcoming payments all in one place. How to consolidate your debt, There are two primary ways to consolidate debt, both of which concentrate your debt payments into one monthly bill. Get a 0% interest, balance-transfer credit card: Transfer all your debts onto this card and pay the balance in full during the promotional period.