Debt Consolidation
Reduce your monthly payment
and eliminate your debt today.
It’s easier than you think.
Debt Consolidation
Reduce your monthly payment
and eliminate your debt today.
It’s easier than you think.
A Debt Consolidation Loan can come in a variety of forms. One simple way to finance a debt consolidation loan is to simple move debt from one financial vehicle to another. Like transferring a credit card balance from one card with a lower APR to another. Or in some cases transferring balances might not be possible. So taking out a secured loan (against an asset) might be a better option. Most often you will be taking out a loan (essentially a mortgage) against your home.
One advantage of getting a debt consolidation loan is that in many cases the amount of debt owed can be negotiated to a significantly lower amount. This depends greatly on the age of the debt and the exact financial situation of the individual. It is not unheard of for consumers to have the amount of debt owed reduced to 40% of its original total.
For many people a consolidation loan is the first strategy they seek when trying to get out of debt.
Debt consolidation loans can be very attractive, since they typically offer lower monthly payments. In addition, most people find that making one monthly payment can give them a better sense of where their money is going, and how much they have left to pay off.
There are a number of ways to consolidate bills. Some methods, such as switching to cheaper credit cards, are easy. Other options are more complicated and require tough trade-offs. For example, if you're a homeowner, should a homeowner take a home equity loan to pay off credit card debts? How about borrowing against your retirement plan at work? Or should you tap the cash value of an insurance policy?
Before you rush out to obtain a debt consolidation loan or a home equity loan to lower your monthly payments, ask yourself three basic questions:
If you still think you are a good candidate for a consolidation loan, here are some options for you to consider:
Switching from a high-rate credit card to a low-rate card can easily save the average person at least $100 or more a year in interest, and even more over the life of the loan. If you haven't already tried to negotiate a lower rate on your credit cards or consolidated your debt onto lower-rate cards, what are you waiting for?
Once you have consolidated to a few cards and carry a reasonable amount of credit card debt, you are likely to be approved for the loans you need.
Most banks offer unsecured lines of credit of several thousand dollars. Interest rates on these loans tend to be slightly lower than average credit card rates, but higher than lower-rate credit cards. If you are interested in a personal loan, check with your own bank first, since some offer better terms and easier approval criteria for their regular customers. Just like with credit cards, bankers are unlikely to extend you a consolidation loan if they think you have too much credit already. People with lots of debt, or even lots of available credit, may be considered poor credit risks, since they could turn around and charge their cards up to their limits tomorrow.
There are two main ways to tap into your home's equity: through a second mortgage or a home equity line of credit. Both of those loans are types of home equity loans. A second mortgage is a loan for a fixed amount. As with other installment loans, you are given the entire amount of the loan at once, and pay it back in regular monthly payments. With a home equity line of credit (HELOC), you are approved for a loan of a certain amount, and then can borrow up to your "credit limit." You can think of an HELOC as something like a credit card, since you are free to borrow as needed and your payments will be based on the amount you have actually borrowed.
Because home equity loans offer valuable tax advantages, they can be an attractive device for consolidating your debts. In most cases, you can deduct home equity loan interest on loans up to the value of your home (but not on any portion of a loan that exceeds your home's value). This only applies if you itemize on your taxes, however.
Here's an example of how a home equity loan can help. Suppose you are paying off a credit card debt of $5,000 at 19.8 percent interest. Your first year's interest would be $847—and none of that interest expense would be tax deductible. However, using the proceeds of a home equity loan to pay off this debt would offer you two advantages: 1. You could probably get the home equity loan at a much lower interest rate (I'll use an example of 10 percent), and 2. The interest you pay would very likely be tax deductible. In the first year, tax deductions on a $5,000, five-year loan at 10 percent interest would amount to a savings of $129.69 while the reduced interest rate would save you $384.61.
Most lenders offer home equity loans equal to anywhere from 50 to 80 percent of a home's value, minus the first mortgage. Suppose, for instance, your house is now worth $125,000, and you still owe $45,000 on your first mortgage. You would usually be eligible for a home equity loan of between $17,500 and $55,000.
Some subprime lenders offer loans totaling 100 percent to 125 percent of the value of your home. These can be particularly dangerous if you need to sell your home or if home values stagnate. Being "upside down" and owing more than your home is worth puts you in a very tenuous financial position should anything go wrong.
Before you go rushing into any options you should strongly consider speaking with a trained professional who can answer all of the questions that you might have. Simply call 1-800-296-0237 to speak with a counselor or fill out the form below to have someone contact you when its most conveinant for your schedule.