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Debt consolidation can be challenging

There are several avenues available in New Jersey to help those struggling with debt find a light at the end of the tunnel. Debt consolidation is one such avenue that can work for some people. However, it may not be the right thing for all, particularly if the debt is not low. This method can also take several years to fulfill, if successful.

Sources of debt consolidation loans

USA Today notes some forms of debt consolidation that people engage in include the following:

  • 401(k) loan
  • Home equity line of credit
  • Debt consolidation loan through online lender
  • Debt consolidation through credit union

These can save borrowers from the high interest rates they are suffering if much of their debt involves credit cards. However, a 401(k) loan is essentially the spending of an important asset. Likewise, a home equity line of credit puts a person's home value at risk. Once a person borrows, those portions of the asset often lose protection from creditors even in a subsequent bankruptcy scenario.

Best practices for successful debt consolidation

Debt consolidation loans can work if the person embraces financial discipline. He or she must typically avoid credit cards that will defeat the purpose of the loan. The debtor must also diligently pay the consolidation loan payments on time. Maintaining a proper budget is mandatory and must include an emergency fund. When those unexpected and unforeseeable expenses occur and require quick payment, another loan is not necessary, nor is credit card usage.

According to Experian, debt consolidation via a personal loan with a lower interest rate means using that loan to pay those high interests debts off all at once, then paying just that one consolidation loan payment each month. The monthly payment will typically be lower than the combined minimums from all of the several paid-off higher interest loans. It can provide rather immediate relief.

However, a borrower often ends up paying more in interest because the term of the loan can be fairly long. One advised strategy, if possible, is to use some of the money the borrower is saving on minimum payments each month, to pay more on the new loan than the regular payment. This tactic can reduce the principal and shorten the amount of time he or she will be paying on that loan.

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