Debt Consolidation Explained

How Does Debt Consolidation Work?

Far too many believe that debt consolidation simply means taking the balances of one credit card and moving it over to a different credit card with a lower interest rates. Even if this is done with many credit cards, the type of consolidation offered is a temporary solution at best, and may land a borrower in deeper financial trouble than they were when they started. The problem with relying on this type of debt consolidation is that credit card companies usually offer "balance transfers" at a rate that is much lower than their regular rate, and as soon as the introductory period (spelled out in very fine print), for the transfer is over, the interest rate on all the balances you transferred over will skyrocket to new highs.

Usually credit card debt consolidation will be offered only to those individuals who have the option of paying down their debt sometime in the near future before (or very shortly after), the introductory transfer rate expires. Speaking with a professional can help you to understand the rules and the pros/cons of using any available credit cards you have in order to transfer balances.

Homeowner Options for Consolidation

If you are a homeowner, you may have another option for consolidating your debt into one simple payment that will have a lower, stable interest rate. Using the equity in your home, if available to take out a home equity loan or line of credit can give you a consolidation option that can quickly mean the difference between bankruptcy and successfully managed debt.

• Home Equity Loans: A home equity loan uses the equity in your home in order to secure a loan from a bank or other lender in the form of a single, lump-sum payment. You can then use this payment to pay off your credit card and other debts such as your car loans. With a home equity loan, you will now have a 2nd mortgage on your home to pay every month. As long as this new mortgage is less than the combined total of your other debts, then, you should be in a much better position for managing your debt burden than before.
• Home Equity Lines of Credit: A home equity line of credit uses the equity in your home much like a home equity loan, but rather than receiving a single lump-sum payment as a loan, you will be able to use the available equity in your home as if it were a revolving loan account similar to a credit card. This means that if you take out a home equity line of credit and are given a $20,000 limit, and use the money in your equity to pay off three credit cards and a car loan totaling $15,000, you will still have $5,000 you can use towards something else. Then, as you pay off that $15,000 you borrowed in your home's equity, that money becomes available for you to use again, if you wish. The downside to home equity lines of credit is that their interest rates can fluctuate, just like with a regular credit card. Also, there may be regulations governing how often you must use the money in your equity or the account may be closed.

You will want to seek debt therapy to know which option is best for your debt situation.