Options for Debt Consolidation

Melissa McCollough

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Published on 02-03-2020

Categories: Member Tips

Debt Consolidation Infographic

Want to organize your finances and become debt free quicker? By consolidating your debt, you can lower your monthly payment and keep more money in your pocket. Here’s how to decide whether consolidating your debt is a good strategy for you.

What’s debt consolidation?

Debt consolidation is the process of streamlining debt from multiple sources down to as few lenders as possible. By doing this, you can worry less with fewer bills and simplify your finances all while reaching your goal of being debt free quicker.

Typical options

Generally there are three major debt consolidation options:

Equity financing

You may be able to use a residence you own as collateral, like a mortgage, to obtain a type of secured loan. Lenders, like Coastal, may let you borrow as much as 100% of the equity you’ve built up in your home.

There are typically two ways to tap this value, with a loan or a line of credit, often called a HELOC. The main difference is usually that you get a single lump-sum loan that carries a fixed interest rate for a preset term, making the payments easy to predict. A credit line is typically available for a fixed period but the amount borrowed and the interest costs can vary over the life of the agreement.

For most borrowers the biggest advantage of tapping home equity may be the tax benefit that can come with it, because the interest can usually be included in mortgage interest that’s deducted from taxable income. However, don’t forget to calculate the price of taking this step, from filing and legal fees to closing costs.

Personal loans

An unsecured personal loan can be another option, particularly for those who don’t own a home. Because there’s no collateral, the rate is generally higher than home equity debt but the terms are shorter and the fees are lower. A loan at a lower interest rate than you’re paying on a credit card balance can save you money and give you a predictable schedule for paying off the debt.

Balance transfers

Transfer high interest debt to a credit card with a low or 0% intro rate with a balance transfer. This can cut your costs, especially if you can pay off the debt within the initial period, which can last as long as twelve months.

If you think debt consolidation can be right but aren’t certain, talk to your lender; a loan officer may be able to help.

Roberta Pescow, NerdWallet

 

 


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