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Is Debt Consolidation a Good Idea?
Are you behind on your bills? If so, you might be thinking about debt consolidation. This option may work for some people to help pay off debt. Debt consolidation loans are typically used for unsecured debts, for example personal loans, credit cards and student loans. Instead of dealing with multiple bills, you have the ability to manage one consolidated bill.
Debt Consolidation Types
| Debt Consolidation Type | Pros | Cons |
|---|---|---|
|
Balance Transfer Card |
Lower introductory interest rates More funds towards principal balance Fewer number of credit card payments |
Generally high interest rates after introductory period Balance transfer & annual fees could get expensive Could hurt credit score if credit card balances are above 30% of credit limits |
|
Unsecured Personal Loan |
Generally fixed interest rate No collateral requirements Installment payments Can be better for credit score by decreasing revolving credit limit used |
Higher interest rates since there are no collateral requirements Repayment terms are generally shorter due to the unsecured nature of the loan Loan origination & other fees may apply |
|
401(k) Loan |
Lower interest rates No minimum credit requirements or impact on credit score Easy automatic payroll deductions for loan payments No application requirements |
No earned investment gains on borrowed funds for duration of the loan Risk of requirement to repay entire balance within 60 days if employment ceases Risk of early distribution penalties & tax liabilities if not repaid timely |
|
Home Equity Loan |
Lower interest rates Interest is generally tax-deductible Repayment terms are generally longer than unsecured loan options |
Collateral requirements Risk home foreclosure if loan is not repaid timely Closing costs & other fees may apply |