In Part 1, we discussed how debt management helps you learn how to get a handle on your finances. However, using debt consolidation and management together will provide you maximum financial results.

Once you have developed good skills for managing your debt, you need to learn some ways to reduce your monthly payments and financial stress. Here are six options for consolidating your debt.

Debt Consolidation

Debt Consolidation in addition to debt management is important. It can help you understand what options you can use help reduce your financial stress.

Bill Consolidation is frequently used to combine all of one’s bills into one bill. Normally, debt consolidation will reduce the amount of your monthly payments. It may also reduce your interest rate. Dealing with one company and one bill is generally much easier than keeping track of many debts and many companies.

There are many different ways to consolidate your debt. Which option is best for you will depend upon your financial situation. Consolidating your bills can relieve a lot of stress. However, remember that you must follow the debt management advice, as discussed in part 1, to insure successful debt relief.

1. Home Refinance

If you own a home, you can refinance it. The objective of a refinance should be to get a lower fixed interest rate. If you have an adjustable mortgage rate, there is always the possibility that your payments will increase.

To be successful at eliminating your debt, you should concentrate on getting the lowest fixed interest rate possible. When your payments are always the same, it’s much easier to plan and execute your debt free plan.

2. Home Equity

A home equity loan is a second mortgage. It usually has a fixed interest rate and fixed time frame. The interest you pay is normally tax deductible and there is no penalty for paying off the loan early.

Be careful with this type of loan. Ideally, you would use this option when you have substantial equity in your home and plan to live in it for the next several years.

If the total amount you borrow for the first and second mortgage is equal to or greater than the value of the home, you could have some difficult experiences. For example, if you wanted to sell your home, you may have problems with your creditors. If you do sell the home, you will more than likely have debt left over which you must pay. The objective of home ownership is not to increase your debt.

3. Home Equity Line of Credit

A home equity line of credit is where you use your home as collateral for a loan. It is setting up a revolving line of credit. You can use the credit repeatedly. The amount of your payment is dependent upon your outstanding balance. That means your payments may not be the same. You can make interest only payments. That is not a good idea because it does not reduce your debt.

Home equity loans are normally set up for a five to ten year period. There is a penalty for early termination of the loan. After the initial loan period, the equity loan converts to a variable principal and interest loan. You must pay this off over a set period, usually 5 to 15 years.

The main concern with either type of debt consolidation mortgage loan is simple. If you default on the payment, you loose your home. It’s one thing to have a lot of debt. It’s an entirely different problem to have no home.

4. Credit Card Consolidation

Many people turn to credit card debt consolidation to as a means of regaining control of their finances. In essence, you take all the credit card debt from all your credit cards and put that amount onto one credit card.

There is very little paper work involved. You do not have to go through a long approval processes. Many credit card companies offer a twelve-month interest free period for consolidating your debt onto their credit card.

In addition, after the twelve-month period is over, you will likely have a reduced interest rate. As long as you make regular payments on time, you can substantially reduce your debt. Do not put any more charges on the card. If you do, you’re only increasing your debt.

However, there is a catch. If you are late on a payment or your payment does not process correctly, your free grace period will likely be over… and you will immediately be charged a higher interest rate. Your real education is in reading the fine print of the agreement.

Credit card consolidation is dangerous unless you’re very disciplined and have a very solid debt reduction plan.

5. Settling Your Debt

Debt settlement occurs when you work with a debt management company. The company will normally negotiate your debt balance. You pay the company and the company works with your creditors. Normally, these companies reduce your debt by half, including any fees the company may charge.

The problem with debt settlement is two fold. First, your credit rating may drop significantly. Second, you must work with a reputable firm. If you do not, your debt will increase and so will your financial problems.

Be sure you do your homework before considering this option. Check out several companies. Compare their services. Compare their fees. Talk with others that have used the company.

6. Borrow From Retirement Funds

If you have a retirement pension plan such as a 401(k), you can borrow from your retirement fund. There is no long processing period and no credit checks. The interest rate is typically quite low. The best part is that the interest is paid to you. It is your retirement fund. You are the lender.

It is very important that you understand that you are borrowing the money from your retirement fund. You are not withdrawing it. If you withdraw the money, you will have two problems. First, you will pay taxes on the amount your withdraw. Two, you are subject to a ten percent penalty.

The other potential problem is if you loose or quit your job. You may be required to pay back the loan immediately. If you don’t, you will again be subject to paying taxes and a ten percent penalty.

Before using this option, consider two things: 1) It will reduce the amount of your retirement funds. If you are younger, you may have sufficient time to recover before retirement. 2) High interest debt will also reduce the money you have for your financial future. When you pay off the higher debts, it may provide the immediate help you need to get back on track.

It would be wise to get counsel from your company about your specific financial situation before making a decision to borrow from your retirement funds.

So, what have we learned? Debt management helps you learn how to improve your money management skills. Debt consolidation provides you with the tools to best use the financial resources you have.

To get the maximum financial results and reduce your debt, use both debt consolidation and management to your advantage. The time to start is today.

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