Debt Consolidation 101
What is it? Debt consolidation involves combining your various debts – credit cards, car loans, retail store credit from furniture or clothing stores -- into a single loan. Think of it as carrying your debt burden in one big suitcase instead of five or six small bags.
What are the benefits of debt consolidation? Combining your debt into one loan can lower the total interest you pay and spread out repayment over a longer time. This can lower your total monthly debt payment. Another benefit is the convenience of one payment, instead of managing multiple bills coming in at different times of the month.
There are several different loan types that can help you consolidate debt.
Loans for homeowners
If you own a home, often the cheapest debt consolidation method is a cash-out refinance or home equity loan or line of credit. These loans take advantage of the equity in your home (the portion of your home that you own) and turn that equity into cash that you can use to pay off debt. The repayment of that debt is combined into your mortgage - in the case of refinance - or consolidated into the home equity loan or line of credit. The interest rate for these types of loans is usually far less than credit cards or other consumer debt, and has the added benefit of being tax deductible. (Check with your tax advisor to be sure.) But keep in mind that the reason cash-out refinance and home equity loans usually have a lower interest rate than other forms of debt is because the loan is secured by your home. That means if you default on the loan, you could lose your home.
Personal loans
Personal loans are unsecured loans that can be used for debt consolidation. They’re likely to have a higher interest rate than a loan secured by property, and an even higher rate if your credit is shaky. If this applies to you, you may want to consider finding someone to co-sign with you. The key to saving when consolidating your debt is to obtain a lower interest rate than you are currently paying, so be sure to compare the interest rate on a personal loan with the interest rates you are currently paying.
Debt consolidation is only one step
Keep in mind that debt consolidation loans can only help you if you change your spending habits and avoid running up more debt. Be sure that you are committed to paying off your debt and cutting your spending before you commit to a new loan. Otherwise you could end up in a worse situation than before.
Want to take the first step to consolidating your debt? Get matched with up to five lenders who can help you find the right loan for you. Start your loan request today!
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