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Debt Consolidation Done Right

By Gina Pogol
Mortgage Credit Problems Columnist


Debt consolidation is a simple concept: replace your diverse consumer debt--credit cards, payday loans, and others--with a single loan and payment. The object of debt consolidation is to make budgeting for and paying off your debt easier. Here's a look at several strategies for accomplishing this.

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Debt Consolidation with Balance Transfers

This involves moving your account balances with high interest rates to new cards with lower rates or introductory offers.

  • Pros: Your new debt is unsecured and could be discharged in a bankruptcy if necessary. You can get a lower interest rate and pay less over the life of the loan.
  • Cons: The new card company could raise your rate once the introductory period is over. The balance transfer fees could eat up your savings. And you still have your cards, which could result in over-spending.

Debt Consolidation with a Personal Loan

Also called signature loans, these advances are secured only by your promise to pay. They carry high interest rates, but their terms may be preferable to those imposed by credit card companies.

  • Pros: You can get a lower rate than you are paying on credit cards and exchange multiple payments for a single one. You can also get fixed rates and terms, unlike those of credit cards. Your loan is unsecured.
  • Cons: These are available to those with good credit only. Rates are very high.

Debt Consolidation with Debt Management or Credit Counseling

While debt management is not technically debt consolidation, it shares many of the characteristics of a debt consolidation plan. Counselors can negotiate lower interest rates with creditors on your behalf. You make a single payment each month, which is divided up and forwarded to your creditors.

  • Pros: Your monthly payments and interest rate can be lower, and you make only one payment each month. Unsecured debts remain unsecured. You may also receive credit counseling.
  • Cons: There are monthly fees. Debt management may show up on your credit report as negative information.

Debt Consolidation with Home Equity

Using home equity to consolidate debt gets you the lowest interest rate and payment, because the loan is secured by your property and because the loan typically stretches your repayment over fifteen years.

  • Pros: Your monthly payment and interest rate should be lower than with any other option. Additionally, your interest may be tax-deductible (check with a tax pro). Your payments can be fixed and your terms won't change over the life of the loan.
  • Cons: Your debt is no longer unsecured and dischargeable in a bankruptcy. You may also pay more interest over the life of the loan because the repayment is extended over many years.

To evaluate debt consolidation loans and find your best deal, complete the form on this site and let lenders present their offers to you.

The debt consolidation option that is optimal for you depends on your financial stability (likelihood of bankruptcy), your access to home equity, and your credit rating. But every option you choose requires exercising discipline to change your spending habits.

Sources

http://www.ftc.gov/

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