Debt Consolidation
Debt consolidation entails acquiring a single loan to pay off multiple loans. This practice is often adopted to secure a lower and/or fixed interest rate. The greater convenience in servicing a single loan is also an important motivator for considering this option.
Debt consolidation may entail merging multiple unsecured loans into a new unsecured loan account. However, it usually involves obtaining a single collateralized secured loan. This collateralization implies pledging a high-value asset, such as a home or car, which may be repossessed by the lender if the debtor defaults on payments. Since the risk borne by lenders is reduced under such loan agreements, they are often willing to relax the loan terms. This enables a borrower to benefit from lower interest rates.
Debt Consolidation Options for Homeowners
Homeowners with a fairly decent equity in their property can consider the following straightforward debt consolidation alternatives:
Home equity loan: The amount of a home equity loan depends directly on the equity built on the home. Such loans carry a fairly low interest rate and long repayment duration, which may be as much as 15-20 years. Consequently, home equity loans enable debtors to benefit from low monthly payments. Payments towards these loans also qualify for interest tax-deduction.
Cash-out refinancing. Refinancing a home for an amount higher than the existing loan outstanding enables one to pay-off the original loan and use the extra cash for payments towards other debts. This may be obtained at a lower interest rate, the payment towards which may be stretched for a longer period. However, the total interest cost under such debt agreements may wind up being relatively large.
Additionally, a debtor with a relatively undamaged credit may qualify for an unsecured personal loan consolidation. Individuals seeking an unsecured loan may consider approaching a credit union, as they tend to charge lower interests than traditional banks. However, credit unions typically have stricter loan eligibility terms.
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