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How to Consolidate Debt

Debt Consolidation
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Knowing how to consolidate debt can be important to getting your debt under control. Whether you have student loan debt, credit card debt, debt from unpaid medical bills, or debt from a repossessed auto loan, debt consolidation can save you a great deal of money and headaches. However, in order to take advantage of this option, you generally must have good enough credit to qualify for a debt consolidation loan. You also must understand how to consolidate debt in order to decide which option is best for you.

How to Consolidate Debt

The actual process of consolidating debt is simple. You are just taking multiple small debts and making them one large debt. You do this by borrowing a large enough sum of money to pay off some or all of your smaller debts. Your new large debt is now your only debt and thus you have consolidated multiple debts into one.

The key to knowing how to consolidate debt is knowing which debts to consolidate and knowing what type of consolidation loan to get. Depending on your credit and your personal situation, you may have several different consolidation options available to you.

Debt Consolidation Options

The debt consolidation options available to you depend in large part on whether you are a home owner, whether you have good credit, and your income and the amount of money you can devote to debt repayment.

A Home Mortgage

If you are a homeowner, one of your debt consolidation options may involve tapping into the equity of your home. If your home is worth more then you owe on it, you may be able to access some of the value in the form of a mortgage or home equity line of credit in order to pay off higher interest debt. This type of consolidation loan consolidates all of your debt into the value of your home.

The major benefits to this type of consolidation loan are the financial savings. Interest on a home equity line of credit or a second mortgage is generally much lower then interest on any other type of loan. In many cases, the interest is also tax deductible.

The major detriment is that you are putting your home at risk by transferring unsecured debt into secured debt. If you are unable to pay off the loan, the bank could foreclose on your home. You should select this option only if you are confident you will be able to make payments.

A Personal Loan

A personal loan is another alternative method of debt consolidation. This involves getting an unsecured personal loan from a bank or credit union. Online sites, such as Lending Club, also allow you to apply for a loan from other private investors. You must have good enough credit to qualify for the loan and you will usually pay a higher interest rate then you would on a mortgage. The interest is also not tax deductible. However, the interest is still often significantly lower then the interest rate on high interest debt.

A Balance Transfer Offer

Balance transfer credit card offers allow you to transfer debt from one or more other sources to the new card offering the balance transfer. You can transfer debt(s) up to the amount of your credit line. Balance transfer cards either pay off your existing creditors directly or send you a check which you can then use to pay off debt(s). A balance transfer is distinct from a cash advance, which usually has a much higher interest rate.

Balance transfer cards often offer you a promotional rate in order to entice you to become a customer. You can take advantage of this to consolidate debt at a lower rate. However, be aware that there is often a 3% fee associated with doing a balance transfer. You also usually want to pay off the full balance within the period that the low promotional rate is offered or the loan can end up costing you more.

Deciding to Consolidate

Once you have evaluated your consolidation options, the next step in knowing how to consolidate debt is to determine whether any of the options will save you money. You can do this by comparing how much you will pay over the life of the new consolidation loan versus how much you would pay if you did not consolidate your debt.

Find local Debt Consolidation Resources

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