Debt consolidation is a way to pay off credit card and other non-secured consumer debt. The idea is to take out a lower-interest loan and have only one payment each month. Secured loans will have a lower interest rate than unsecured loans. A secured loan is one that offers an asset as collateral. Auto loans and home loans are examples of secured debt.
A debt consolidation loan is a good idea when your credit card debt has become unmanageable. There are a number of agencies that can help with a debt consolidation loan. If you work with a non-profit, they will usually require you to modify your spending habits. A debt consolidation loan will help you out in the short run but if you continue the same spending habits, you’ll wind up with the same problems in a short amount of time.
A credit counselor can often help you to pay off your debt and change the behaviors that caused the trouble in the first place. But there are many scams associated with debt consolidation programs from less than honest credit counseling programs. Check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling to see if the service you're considering is a member of either group.
Home equity debt consolidation loans are a good way to consolidate your current payments into one lower monthly payment. Most people prefer home equity loans to consolidate their debt. The reason is simple, you can quickly lower your monthly payments, and interest.
To quickly calculate how much you can borrow from your home, take current value of your home, minus the amount you still owe, and the different is the amount of money you could use to consolidate your loans. Some loan programs like the 125 home equity loan will allow you to borrow up to 125% of the value of your home. So for example, you owe $20,000 in credit card debt, your home is worth $150,000 and you still owe $120,000 on your house. One option is to get a debt consolidation loan that would allow you pay off your credit card debt and now you would owe $140,000 on your home, but your credit card debt would be paid off.
A different scenario is real estate prices in your area have gone up and your property is now valued at $200,000. This means that your equity is now $80,000 because you use the new value ($200,000) minus debt ($120,000) to arrive at the amount of your equity. This would be useful if you have $50,000 in credit card debt and need to get a debt consolidation loan to cover all of it.
The amount you can borrow against the equity in your home varies from one lender to another and is determined by the loan you take out. If you can’t refinance at a lower rate, you should think twice about paying off unsecured debt with home equity loans. If your new payments are much higher than your old payments and you can’t meet the new obligations, you could lose your home.
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