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Debt Reduction

5 Ideas For Debt Consolidation

In these hard economic times, many are finding jobs harder to come by and debts that are growing and seemingly impossible to pay off. With credit card debt at an all time high and interest rates on many of those cards at an astounding 21 to 25 %, paying off a credit card balance can become an insurmountable obstacle that many can not recover.


This is just where the credit card companies want to keep you but debt consolidation might be your answer to the problem. Combining multiple debts into one monthly payment, can reduce the amount paid monthly and usually comes with a lower interest rate making things more manageable. There are several different ways to accomplish this.

Personal Loan

A debt consolidation personal loan is one option. Moving all credit card debt from one lender to another is essentially what is done. However, personal loans may have a lower interest rate than credit cards if you have good credit but since they aren't backed by collateral it may not be your best choice. Personal loans are usually over a structured time frame (3-5 years), and the interest on the amount loaned is calculated into the entire amount owed. This means you will not incur any changes in interest rates over the life of the loan as you would be with a credit card.

0% Balance Transfers

Over the years this has been my favorite way to get out of credit card debt. It's often possible to consolidate debt with a transfer to a new credit card that offers extremely low or zero interest on balance transfers. Some offer a specific time frame in which the interest is low or at zero, or al 2-4% rate until the transferred balance is paid off. If you pay down one of your existing cards they will often send you an attractive balance transfer offer. Be aware that many will increase your interest rate if a payment is late or missed!


Borrowing From A Life Insurance Policy

Borrowing from a life insurance policy is an option for some of us who had parents buy us whole life policies when we were young. Many life insurance companies allow the policy holder to borrow from a policy if there is a cash value. At the time the funds are released the policy holder can elect to pay the money back, and in that case interest is paid. The policy holder can also elect not to pay back the funds however, the cash value and the face value are reduced by the amount withdrawn.

Home Equity Loan Or Line Of Credit

This is usually the best option for Home Owners as they are backed by the equity in your home so they have very low interest rates. It's not uncommon to get a home equity loan or home equity line of credit (Heloc) for less than 5% interest. This can dramatically reduce the amount of interest you are paying an allow you to pay more toward reducing the principal.


Borrowing From Friends Or Relatives

Borrowing from friends and family is another way to consolidate your debt, especially if you don't own a home or have good credit. If you have a family member who is receiving a low rate of interest from a bank account, this may be the way to go. However, if you default on the loan it could be a rather awkward situation. Always get the loan in writing and always pay it back on the scheduled dates. Treat you family member the same as you would any other type of creditor and things will go well.

There may be a better solution however, a company called Prosper is matching up investors who want better interest rates with borrowers who need to refinance debts. This is a win/win situation and is proving to be quite successful. They currently have about 1.2 million members and have funded about $300 million in loans. You may want to consider this option before going to friends or relatives.

Getting out of debt is never an easy thing to do, and while these tips are not going to get you out of debt today, they are all valid ways for debt consolidation. The key is to reduce your number of monthly payments, minimize your interest rate and stop using your credit cards for unnecessary purchases!