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5 Debt Consolidation and Debt Management Strategies

Debt Consolidation

Use Debt Consolidation and Good Money Habits to Manage Debt and Build Wealth 

In today’s swipe-and-go, buy-now-pay-later credit card culture, it’s easy at times to lose control of your finances and feel as if all your money is going just to pay off your bills. If that sounds like you, you may need a debt consolidation strategy, where you combine all your bills into one single payment that is easier to manage and more affordable.

Here are 5 debt-consolidation and management strategies to get you moving ahead financially. Discuss them openly and honestly with your accountant, tax advisor, legal counsel and other representatives whom you trust and rely upon for unbiased financial information and advice that you can apply to improve your unique financial situation. 

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1. Personal Loan

Paying off your assorted higher-interest rate debts with a personal loan from your bank or credit union with a lower interest rate is one debt consolidation strategy. On a personal loan, expect the interest rate you pay to be higher than the interest you would pay for a home loan or car loan, but you don’t have to put up your home or your car as collateral.

The lender will base its approval on your credit score. If approved, you will receive a lump sum upfront and pay back the money (plus interest) in regular monthly installments.

In weighing whether a personal loan will save you money in the long run, compare the total cost (fees) of the loan, not just the interest rate.

2. Home Equity Loan

To be considered for a home equity loan, you, of course, need to own a home, and the value of your home should be greater than what you owe on the mortgage. This surplus is your home equity, which you may be able to borrow against, usually up to 80% or 85% of your home’s value (varies by program).

The home equity loan is a second mortgage that you will repay with principle and interest at a fixed rate over a set number of years. Because a home equity loan is a secured debt, if you fail to pay it back, you could lose your home.

A home equity loan can be a winning debt consolidation strategy if you use the money to pay off your credit cards and other higher-interest rate debts. It generally offers lower interest rates than a personal loan or credit card. A home equity loan also keeps your favorable first mortgage intact. 

3. Cash Out Refinance

Unlike a home equity loan or HELOC (Home Equity Line of Credit), a cash out refinance replaces your existing mortgage with a new mortgage for more than you owe on your house. The difference goes to you in cash. 

Because a cash out refinance is a first mortgage, it should offer a lower interest rate than either a home equity loan or HELOC.

The new loan may be at a higher interest rate than your current mortgage, but the cost of money could be less than what you’re paying on your higher-interest rate credit cards. Be sure to discuss this option with your New American Funding Loan Officer.

4. Debt Management Plan

Unlike all strategies described to this point, a debt management plan or DMP is not a loan. Rather, it’s a strategic effort by a debt consolidation company you hire for a fee to help you negotiate or restructure your unsecured debt such as credit card and medical bills.

Typically, the company will negotiate on your behalf to lower the interest rate you’re paying on each credit card account. Then you will pay one fixed monthly payment to the consolidation company that will then forward to your various creditors.

This type of program may also negatively impact your credit scores in the short term, as creditors may report that you aren’t paying back money per your original agreement with them.

5. Do-It-Yourself Debt-Management Plan

You could, of course, choose to call each of your creditors directly to try to negotiate an interest rate reduction or less onerous payment plan. This will save you from paying a fee to a debt management agency. 

This debt relief strategy can possibly trigger tax consequences so talk to your accountant or tax advisor before invoking such a strategy. 

There are several debt consolidation plans and debt relief options to help you regain control of your finances. But even with these strategies, you should commit to forming good life-changing money habits for staying out of debt and building wealth. 

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