Debt consolidation can be an excellent choice for a borrower who is having difficulty keeping up with their credit card debt. When executed properly, the debt consolidation process rolls outstanding credit balances from a number of creditors into one new loan with a lower overall interest rate. A borrower will pay less in interest on the new consolidated loan, and a single loan with just one monthly payment is much easier to track than are multiple payments to lots of different creditors.
Typical debt consolidation loans are achieved by borrowing against the equity in your home or by taking out a new loan on your automobile. Both of these loans are secured by your personal property, so the lender assesses these loans as less risky that an unsecured loan such as a credit card. Since there is less risk to the lender, the interest charged to you will be lower. Lower interest rates are desirable because they mean that you pay less money over the course of the loan. Just be sure that the new monthly loan payment is manageable; in the worst case scenario, if you miss your monthly payments, you could end up losing your home or your car.
If you are a homeowner, the debt consolidation process almost always involves tapping into the equity in your home. This equity builds up over time due to the mortgage payments you make, to appreciation in your home's market value, or to both circumstances. Lenders have a number of options for you to consolidate your debt using your home's equity: a cash-out mortgage refinance, a home equity loan, or a home equity line of credit.
Cash-out mortgage refinancing is quite common; this financial transaction involves applying for and receiving a new mortgage loan, paying off your existing mortgage loan, and using the extra money received to pay off credit card debt. The interest rates on first mortgages are some of the lowest rates that consumers can find on loans, so this method can save money over time due to a low interest rate on the monthly payments.
» read more about Mortgage Refinance »A home equity loan can be useful for debt consolidation. In this method, the first mortgage is left intact, but you take out a new loan that uses the additional equity in your home as collateral. Home equity loans are usually fixed-rate loans and almost always feature tax-deductible interest.
» read more about Home Equity Loan »A home equity line of credit (abbreviated to HELOC) sounds like the same thing as a home equity loan, but in reality, these are two completely different transactions. A home equity line of credit is a lot like a credit card, since you borrow just the amount you need and make monthly payments on the outstanding balance. Like a credit card, the interest rate on a HELOC is variable, and you also have an overall credit limit on the maximum amount you can borrow.
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