When you’re trying to pay down debt, it can be overwhelming to keep up with payments to multiple creditors. Often you end up paying more on interest than you do towards the debt itself, which can cost you tens of thousands of dollars or more a year.

The good news is that debt consolidation offers an excellent way for you to manage your debt responsibly and wisely, so it gets paid down faster, and you end up paying far less interest. However, there are several different debt consolidation options.

Finding the right one can make all the difference for your monthly finances. Here we look at the best options for debt consolidation to help you pay down debt quickly and improve your cash flow.

Debt Consolidation Loans

A debt consolidation loan provides you with the money needed to pay off all your outstanding debt in one shot. You then have a single payment for your consolidation loan, which is far easier to manage. You become more organized, but even better, you usually have a far lower interest rate, especially when looking at credit cards.

The benefits of a debt consolidation loan are:

• One manageable payment each month
• Lower interest rates to save you money over the life of your loan
• You pay your debt quicker
• You maintain a better credit score with easier payments
• You can find you have more cash flow you can put towards savings

You should always consider applying for a debt consolidation loan before your credit score begins to suffer. This way, you will get the best possible interest rates available.

There are a few disadvantages of a debt consolidation loan, including:

• You sometimes require collateral
• Your credit score has to be decent
• Home equity loans offer lower interest rates
• Banks rarely approve unsecured debt consolidation loans

If you have good credit, regular income, and your total monthly debt payments aren’t out of control, you have a good chance of qualifying for a debt consolidation loan.

Home Equity Loans

This type of loan is also referred to as mortgage refinancing or a second mortgage. The bottom line is that a home equity loan allows you to access your home equity to put towards your debt consolidation.

You have to own your home to consider a home equity loan. It’s a simple process that considers how much equity you have built up in your home. This is based on how much you have paid down your mortgage in hand with the current appraised worth of your home.

For example, if your home is currently worth $400,000. And you have paid $250,000 towards your mortgage so far; your home equity would be $150,000. However, you can also add more equity based on your home’s current value.

The longer you have owned your home and the more mortgage payments you have made, the higher your home equity. You can apply to your bank to see if you qualify for a home equity loan. Often the bank will offer you the same interest rate as your mortgage, which in most cases works out to be one of the best rates available. In some cases, however, they might charge a higher interest rate.

The benefits of a home equity loan are:

• Lower interest rates than debt consolidation loans
• Flexible payment arrangements

However, keep in mind you will have to have built up enough equity in your home to apply, and in some cases, you might be charged some fees.

Line of Credit

A line of credit offers you a larger sum of credit at your disposal, providing you with the money needed to pay off your debt in a lump sum. However, today these can be harder to come by. You’ll need an excellent credit score to acquire a line of credit at a reasonable interest rate in hand with a proven steady income and positive net worth depending on the lender.

In essence, your bank account is extended to include the loan amount so it can be spent like cash. Of course, though, it has to be paid back like any other form of credit. Lines of credit tend to have reasonable interest rates that are far lower than credit cards. You can pay down your debt quickly and save a large sum of money on interest.

The benefits of a line of credit include:

• Often the lowest interest rate available
• You can be more flexible on how you pay the money back, often with an option to just pay interest, although this is highly inadvisable

The downside to the line of credit option is that they might be too flexible. If you have shown to lack discipline in managing your finances in the past, this could make matters worse. They make it easier to avoid paying down your debt and often provide you with more money than you need, which in turn gets you further into debt.

This option is only advisable for those committed to paying down their debt. With little threat to a change in income, that could interfere with the payment plan.

Credit Cards

In many cases, credit cards will offer a very low promotional interest rate to entice you to get a new card.

If this is the case, and your debt is not too high, you can apply for the new card, get a good credit limit, and pay off your other debt in one payment. You then have to aim to pay back your debt before your special interest rate runs out.

Your goal would be to find the lowest interest rate for the longest period of time, and then pay as much as you can afford each month until the balance is completely paid off.

You will, of course, have to have excellent credit to take advantage of this option.

The benefits of credit card consolidation are:

• You will have one easy payment each month
• You will have a lower interest rate than your other credit cards
• You can increase or decrease payments based on the amount of money you have available each month, which allows you to pay the minimum payment when funds are required elsewhere

As mentioned, the downside is that it can be hard to qualify, and you will have to pay the balance down before the promotional interest rate expires. Be very careful with promotional rates as while the initial rate can be temptingly low, the new rate can be far higher than you expect.

If something happens and you can’t pay the balance off before the regular rate kicks in, you could find you can’t afford the minimum monthly payments.

If you would like more information about the best options for debt consolidation, call Charles Advisory at 416-486-9660 or contact us here.