How to Consolidate Your Debt: 3 Options

November 5, 2013

consolidate your debtOne of the ways that you can make your debt a little more manageable is to consolidate it. Debt consolidation allows you to put all your debts together so that you only have one payment and one interest rate. Over time, you can save money in interest as well as make sure that your debt payments are manageable while slowly paying off your debt! There are three main options when it comes to debt consolidation:

1. Unsecured Debt Consolidation Loans

In some cases, it is possible to get an unsecured debt consolidation loan. This loan might come in the form of a personal loan from a bank, or it might even come as the result of balance transfers to a 0% credit card.

However, in order to qualify for this type of debt consolidation loan, you usually can’t have a great deal of debt. These types of loans come with moderate interest, and since they are unsecured, you don’t have to worry about losing your home or other assets if you default.

A bank is unlikely to provide you with a personal loan of much more than $5,000 especially unsecured. Additionally, you aren’t likely to be able to find a credit card with a high enough credit limit to perform a balance transfer that will help you pay off all your smaller debts. However, a credit card balance transfer can be great if you have a lot of small credit card balances you are paying interest on. Consolidate them with a 0% balance transfer deal and save money in interest.

2. Home Equity Debt Consolidation Loans

Another option for a debt consolidation loan is to secure it with the equity in your home. If you have more debt, you might be able to get a loan to pay it all off – provided you can secure it with your home. With this type of loan, you take the ownership you have in your home and borrow against it. You use this larger loan to pay off of your other debts.

One of the advantages of the home equity debt consolidation loan is that the interest you pay can be tax-deductible. Additionally, the interest rate on a home equity loan is usually much, much lower than what you are paying on your other debts. As a result, it is possible to consolidate more high interest debt, and possibly see a tax benefit to boot.

However, you have to be careful with a home equity debt consolidation loan. Realize that you are securing your debt with your home. If something happens, and you are unable to make payments, you could lose your house. Not fun!

3. Non-Loan Debt Consolidation

In addition to the possibility of taking out one big loan to pay off the smaller loans, you can also consolidate your debt with without borrowing. There are debt consolidation companies that will help you negotiate lower interest rates with your creditors, and create a manageable payment plan. You make one monthly payment to the debt consolidation company, and the company makes payments to your creditors.

This type of debt consolidation helps you so that you don’t have to borrow to consolidate, and it helps you avoid securing your formerly unsecured debt with your home. However, all of these companies charge fees, so you will need to shop around to make sure that you aren’t being gouged. You also need to be on the look out for scams. Properly vet any debt consolidation company you choose, since there are plenty of unscrupulous companies out there.

Bottom Line

If you are having trouble keeping track of your debt payments, debt consolidation can help. However, you do need to be very careful. Consolidating your debt doesn’t meant it’s gone; it merely means that you have it lumped together. One temptation with debt consolidation – especially if you have a debt consolidation loan – is to feel as though you have “more money” available. For example, a home equity loan can pay off your credit cards, so it feels like you have a lot of room. Once you start charging up the credit cards, without paying off your loan, you are in even bigger trouble than before!

In order for any debt consolidation effort to work, you have to be committed to changing your financial habits, and you need to stop acquiring more debt.

Have you consolidated your debt? What did you do, and how did it work out? Leave a comment!

This article was originally published on October 1st, 2012.


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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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2 Responses to How to Consolidate Your Debt: 3 Options

  • Venita Delaroca

    Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.-.


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