5 Tricks to Consolidating Your Debt and Saving Money


If you're in the red, repaying the money you owe as quickly as possible can save you big. The longer you carry a balance on credit cards and loans, the more interest you'll rack up on your debt — and the more you'll have to fork over when all is said and done. (See also: Snowballs or Avalanches: Which Debt Reduction Strategy Is Best for You?)

One way of speeding up the repayment process is debt consolidation. Consolidating the various balances you're carrying on different credit cards and loans into one single amount can help you obtain a lower interest rate, which will save you money over time. It will simplify your debt repayment, making it easier to get a handle on what you owe. Read on for a roundup of your best debt consolidation options.

1. Execute a Balance Transfer

If you're carrying debt on a credit card with a high interest rate, you can save big by transferring the balance onto a new card with a lower rate. Some cards offer promotional interest fees as low as 0%, which can be monumental in helping you conquer your debt faster. But it's essential to have good credit in order to qualify for a card with a low interest rate. There's typically a fee in the range of 3% of your debt that you'll pay upon shifting your balance onto the new card. And be mindful that that introductory 0% interest rate won't last forever. Most of these offers expire in 15 months or less, so use that time wisely to pay down your debt quickly. (See our favorite credit cards for 0% balance transfers)

2. Take Out a Peer-to-Peer Loan

In peer-to-peer lending, borrowers obtain a loan from individual lenders without going through a traditional financial institution. The greatest benefit of P2P loans are their interest rates, which can be as low as 7% for borrowers with good credit — this means you can save money in the long term. The two largest P2P platforms are Prosper and Lending Club. Both charge fees for new loans (2.41% to 5% of the total loan amount at Prosper and 1.11% to 5% at Lending Club), depending on the size of the loan.

Once you're approved, you'll receive the funds in a few business days (which is much faster than a bank loan). Another notable difference between P2P loans and those issued by banks are that they come with a fixed term for payment, meaning the borrower typically has a deadline of three to five years to pay the loan off entirely, with monthly payments to meet. "Some people like the idea of having a fixed term for the payment," said Peter Renton, founder of Lend Academy. "It's a kind of enforced discipline. They know they have three or five years on a loan and they will have paid off their debt." (See also: Should You Use Peer-to-Peer Lending to Pay Down Credit Card Debt?)

3. Tap Into Your Home Equity

If you own a home, you may be able to use your home equity to consolidate your debt. The risk, of course, is that if you don't use that equity responsibly, you could find yourself facing foreclosure. But if you're careful not to overextend yourself, tapping into the equity of your home and then repaying yourself can be a very convenient way to consolidate your debt.

First, you need to decide between two choices: a home equity loan or a home equity line of credit. The annual percentage rate (APR) for a loan typically incorporates points and finance charges, whereas the APR for a line of credit typically reflects only the interest rate. With a loan, you'll receive a payment totaling the full amount borrowed upon closing. With a line of credit, you'll be handed a checkbook with which you can write checks against your equity up to the amount of the line of credit. Home equity lines of credit or HELOCs are similar to credit cards in that interest is only charged on the amount withdrawn. In fact, most of them give homeowners as long as a decade to draw out the equity and then another 15 to 20 years to repay it after the draw period expires.

4. Borrow From Your Retirement

This is a last resort means of debt consolidation, but if you're in dire straits, you might want to investigate borrowing against your 401(k), 401(b), or pension plan at a low interest rate. The benefit of borrowing from your retirement is that it enables you to pay back your plan (generally under more favorable terms), rather than having to pay back a lender. The drawback, of course, is that you could be jeopardizing your retirement savings.

5. Borrow From Your Life Insurance Policy

Another last-ditch option is borrowing from your life insurance. You can take out a loan against it (typically up to the value of the policy), and with the proceeds, consolidate your debt. Your insurance company usually won't require you to make payments, but it's a good idea to do so anyway. Failure to repay a life insurance policy loan means your family may be entitled to nothing when you die.

How have you considered consolidating your debt?

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Guest's picture

All of these are great options . . . if you're really serious about paying down debt. We used debt consolidation and balance transfers in the past. They were helpful in keeping those debts stable, but we kept on spending too much money. Those of us battling debt should definitely use these tools, just don't let them make you too relaxed. The money is still owed, even if you're not paying high interest rates on it.

Guest's picture

These are awesome tips for anyone trying to consolidate their debt. Money can definitely be a tricky thing to deal with sometimes. I've certainly come to see that credit and debt can become a pretty big problem if you aren't smart with your money. I really like the tip about dipping into your retirement plan. That's a great way to use a bit of money that you already have. Just make sure you replace it as soon as you can!

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