Debt Consolidation: Pros and Cons of 5 Alternatives

By Barbara Marquand
Mortgage Credit Problems Columnist

Each month you face an intimidating stack of bills and struggle to meet multiple due dates, not to mention pay sky-high interest payments.

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Wouldn't it be nice to roll all the debts into one at a lower rate?

That's the aim of debt consolidation. But although it sounds like a dandy idea, it's also risky and can be tough to do in a tight credit market. Here's a look at alternatives and the pros and cons of each.

Home Equity Loan or Home Equity Line of Credit

Both of these loans let you borrow against the equity you've built up in your home. The home equity loan provides a lump sum of cash, and the HELOC provides a revolving credit account.

Pros: Interest rates are lower than most credit card rates and is tax deductible in most cases.

Cons: You could face foreclosure if you default, you erode your hard-earned equity, and you could be turning short-term debts into long-term debts, which can cost more over the life of the loan.

Cash-Out Refinancing

With cash-out refinancing, you refinance for more than you owe on your home and use the leftovers to pay off your other debt.

Pros: Mortgage rates are at historic lows, and interest is tax deductible. Beware, though, bad credit mortgages carry higher rates than mortgages for good credit.

Cons: If your home's value has declined, you may not have enough equity to do a cash-out refinancing. You shrink the amount of equity you'd get if you had to sell the home, and you could lose your house if you default.

Personal Loan

You could get a personal loan to pay off other debts.

Pros: You don't risk loss of your home if you default.

Cons: Personal loans are difficult to get if you have bad credit, and they carry relatively higher rates than mortgages or home equity loans.

Balance-Transfer Credit Card

You transfer balances from high-interest credit cards to a lower-interest credit card.

Pros: Your home isn't at stake, and you don't eat up valuable equity.

Cons: That low introductory interest rate will rise, and you may pay a balance-transfer fee, usually a few percentage points of the amount transferred. With poor credit, you may not quality for the advertised low rate.

Get help from a reputable credit counselor through the National Foundation for Credit Counseling to address your spending habits before you consolidate debt. Once you've gotten help and considered your options, you can get free quotes from lenders by filling in the form on this page.


http://www.federalreserve.gov/ / http://freakonomics.blogs.nytimes.com/ / http://www.kiplinger.com/ / http://www.smartmoney.com/

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