What is debt consolidation?
Debt Consolidation is a form of rolling all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments.
How do you consolidate your debts?
There are many ways to consolidate your debts. One way is to transfer them to a credit card with a lower interest rate. Take into consideration that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time. Another method is to obtain a home equity loan. Most banks and mortgage companies offer home equity loans. You’ll need to fill out an application and demonstrate to the lender that you’ll be able to make regular monthly payments. Usually, you can borrow an amount equal up to 80 percent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should compare lenders.
Advantages of debt consolidation
- The monthly payment on a consolidation loan is usually lower than the all payments of smaller loans
- Consolidation loans offer lower interest rates
Disadvantages of debt consolidation
- If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. It means that the lender can foreclose on your home if you default on the loan.
- If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.