Do It Yourself Debt Consolidation
People often consolidate debt to simplify their finances. But there are risks. You might wind up paying more if you consolidate interest-free debts into an interest-charging loan. And there's the risk of consolidating debt into one loan, then charging up your cards again. An alternative to consolidating might be to put all loans on an automatic payment with your bank. But if you want to consolidate, there are several vehicles to do so.
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Unsecured Loan
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If you can get an installment loan from a bank or credit union, you can consolidate debt that way. If the loan does not cover all your debts, a debt consolidation calculator can help you ascertain which debts you should cover. Consider how much more you will spend if you consolidate many interest-free debts into an interest-charging loan. Also, look at how much you could save if you pay a higher-interest debt instead.
Home Equity Loan
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If you have equity in your home, you can often borrow against that equity to consolidate other loans. For example, if you owe $100,000 on a $150,000 home, you might be able to borrow $30,000 that you previously paid for your house and use that money to pay off other debts. Since home equity loans are secured by your home, they're easier to get from banks. The down side is that you are removing a source of financial security and even risking the loss of your home if you aren't disciplined to pay the debt.
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401k Loan
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Frequently, you can borrow from your 401k plan, and since you are borrowing from yourself, the loan doesn't even show up on your credit report. Normally, according to SmartMoney, you can borrow up to half of your vested balance. Some policies only allow borrowing for specific reasons. You wind up paying interest over several years, but you're paying interest to yourself. The downside is you're losing the benefit of having that money making money in your retirement account. If you don't pay it back, you have to pay income tax on the loan and a 10 percent penalty for early withdrawal. And if you lose your job, you have to pay it all back immediately or pay taxes and penalty.
Credit Card Transfer
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With all the juicy offers to transfer credit card balances, it's easy to be drawn into this plan. But your credit rating could suffer if you have too many cards. If you only have one or two and can transfer some debt to a low-interest-rate card, this may be the way to go. If you have more, you can transfer balances all onto one or two existing cards if there's room in your credit limit. The downside is that credit ratings depend heavily on credit utilization and prefer to see balances well below the credit limit.
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