Debt Consolidation: How’s and What’s

Feb 26, 2019 by

Debt consolidation is basically merging multiple debts into one new loan. With debt consolidation, you are essentially refinancing your old credits into one with better terms. This will convert your multiple monthly payments into one payment to a single loan, taking a lot of stress out of your financial life juggling to those multiple petty debts. The biggest benefit in here is cutting down on your interest payments which you may divert as payment for the new debt. Through this, you can manage your finances wiser.

The “How To” Procedure

Here is the step-by-step procedure of debt consolidation:

  1. Make a list of the debts you want to consolidate.
  2. In column format, make a list for each debt the total outstanding balance of amount owed, the interest rate and monthly interest expense, monthly payment, and monthly due dates.
  3. The first column represents the total amount for consolidation. This is the amount you shall apply for a loan, in case.
  4. The second column is the total interest expense you are currently accounted for every month. You will compare this amount to the interest you will incur in your new debt.
  5. Decide on whether to proceed or keep your current debts. Consider terms of payments thru cost-benefit analysis and choose wisely the type of debt consolidation alternative.
  6. If you decide to consolidate debts, proceed to your debt consolidation plan.

Consolidation Alternatives

While most debt consolidation techniques are easy to understand, some might find it complex and tricky. Here are some recommended ways on how to consolidate debts:

  1. Personal loans

These are loans and credits available from banks and some credit unions. Though personal loans are very accessible, high credit score is very much vital for application of new loan. So if you are struggling in your credit score, the interest rate which will be imposed on your new loan may not materially vary from the rate you are currently paying for.

  • Home Equity Line of Credit (HELOC)

A HELOC is a form of credit involving a fixed amount of money from where you may draw funds as needed, for a fixed period of time, usually ranging from 5 to 10 years. After which, repayment of the debt starts which typically runs 10-20 years. Low introductory and teaser rates and relatively fixed or variable interest rates which are certainly lower than credit card rates are what the HELOC has to offer.

Homeowners, who have an ownership stake or equity, meaning the value of the house is more than what you owe on it, may be able to take out a new loan and use this equity as collateral. Interest rates on these loans are relatively lower than other revolving credits like credit card debt. But beware, if you don’t pay back, you could lose your home.

  • Balance Transfers

Many companies offer an opportunity for their debtors to settle credit card debts with 0% interest rates. This is often referred to as “introductory rate”. The balance on the credit cards is transferred to a new 0% interest-bearing debt. This offer will expire after 6-12 months, which will give you an opening to save and make more progress on paying off the debt. After which; the rates on the new card jump to between 15 to 25%. Some transfer fees and penalties may also be imposed. A prompt payment, however, should be ensured before the introductory rate period expires since the rates are relatively higher upon expiration.

  • Debt Settlement / Debt Relief

This option is best for those who have already exhausted all other options but pose no chance of settling the full amount. Debt settlement companies come to aid and help you reduce the amount you have to pay by 25-50%. However, this will leave a severe negative remark on your credits reports and will damage your credit score. Future plans of buying a house or car may be affected by this debt consolidation alternative.

  • Borrow from your 401k / Retirement Account Loans

You may be allowed to borrow up to 50% of your retirement fund and pay it back within 5 years. The interest rate is comparatively lower. However, you may be exposed to the risk of tax consequences and penalties for withdrawing from your retirement fund.

  • Signature Loans / “Good Faith” Loan

This is a type of unsecured loan where the debtor will only be required to sign a promissory note as a promise to pay back the loan. The interest rate on this debt consolidation alternative is relatively high since this loan is unsecured, re: no collateral involved. Individual’s reputation in relation to previous debts is taken into consideration and will serve as the basis for granting this type of debt consolidation.

  • Do-It-Yourself (DIY)

This method will rely primarily on your initiative and efforts to reduce your amount due for payment or negotiate a lower interest rate. There are two (2) types of DIY debt consolidation:

  1. Debt Stacking (Avalanche Method) – Debts will be sorted based on interest rates. Payment of the debt will be made from highest to lowest rates; taking debts with higher interest as priority will reduce your credit fees.
  2. Snowball Method – The process is the same with the Avalanche Method, except that this takes into consideration the balances of the debts instead of the applicable interest rates
  • Change Your Habits

The most effective debt consolidation technique is learning to live within your means. Make a budget and stick to it. List down expenses before actually purchasing it. Most often than not, expenses are rather wanted than needed, especially those that are purchased using credit cards. These expenses are usually out of the budget.


The decision on consolidating your debts must be thought of rigidly. The method or alternative on how to consolidate debt should also be taken into consideration, in addition to the terms of payment required by those alternatives. Maximize your payment terms and pay on time.

You should not be in debt forever. There are ways you can be debt-less or even debt free. Proper management of funds and living within your means are the most practical ways you can avoid incurring debts.

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