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Paying your debts off early can feel like a load off your shoulders, but there isn’t just one way to manage your debts. Here’s what you need to know about debt consolidation and the debt avalanche versus debt snowball methods.
If you have various types of loans scattered across multiple lenders, a debt consolidation loan may make it easier to pay off and manage those loans.
A debt consolidation loan offers consumers the ability to roll all their debts into a single loan with just one monthly payment. These types of loans are typically unsecured and come with fixed interest rates.
Some lenders may even send the loan funds directly to your original creditors when you take out a loan.
Debt stacking, or the debt avalanche method, is a debt repayment strategy that involves prioritizing debts with the highest interest rates.
To do this, examine each of your debts and find out which ones have the highest interest rates. Order them from highest to lowest, then focus on paying off the debt with the highest interest rate. Once you pay off that debt, move on to the debt with the second-highest rate and so on.
While this can be an effective strategy to save you money on interest in the long run, some people may not find it as enticing since it can take some time to pay off debts in this order.
The debt snowball method focuses on borrowers paying off debts with the smallest balances first.
With this strategy, you can look into all your debts, then list them out from smallest to largest. From there, you’ll prioritize paying off the smallest debts first.
While you may spend more on interest in the long run than you would have with the debt avalanche method, this strategy can feel more inspiring to some borrowers as they’ll see more wins early on in the process since the balances are smaller.
Take out a personal loanThis type of unsecured debt isn’t backed by any assets, which means you won’t run the risk of losing your home, car or similar item if you default on it. As a result of lenders taking on more risk, personal loans may include higher interest rates.
Consider debt settlementThis form of debt relief offers you the opportunity to negotiate your debt with your creditors either as an individual or through a debt settlement company. The idea is to come to an agreement with your creditors to settle for a smaller amount than what you owe. Unfortunately, there is no guarantee that your creditors will agree to this. Keep in mind that debt settlement can show up on your credit report and may negatively impact your credit score.
Tap your home equityA home equity loan allows you to borrow up to 85% of the equity in your home, or the difference between the value of your property and the balance of the mortgage owed on it. You could use the lump sum to pay off your outstanding debts — however, you could also lose your home if you default on the loan.
Use a balance transfer credit cardWhile you could pay little to no interest during the promotional period offered on a balance transfer card, you will likely still have to pay a balance transfer fee. Still, it could work in your favor if you’re able to pay off your loan quickly.
Borrow from your retirementIf you have enough funds already saved up in your account, you could take out a loan from your 401(k) to cover your debts. While you would forfeit the interest that would have been paid on your account, you could get up to five years to pay back the funds without penalty. However, there are some tax implications involved. In addition to regular income tax on the amount you withdraw, you will also pay a tax when you withdraw it again in retirement.
Nonprofit debt consolidation or debt management planRather than taking out a loan to pay off your debts, you could work with a nonprofit credit counseling agency to negotiate a lower interest rate and monthly payment from your credit card company.