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Title: Debt Consolidation Options
Phrase: Debt ConsolidationLearn the pros and cons of each option.
Once you have decided on debt consolidation as the means to pay off your credit cards, the next step is to consider all your options so that you can find the best choice for you. Some choices are better than others, but all should be examined to see which best meets your needs.
Balance transfers
Often, credit card offers will arrive in the mail, advertising extremely low rates if you use that card to transfer the balances from your other cards. This can be an effective tool for debt consolidation if used wisely.
Pros:
- The offer often comes with a very low rate, such as 1.9 percent for a set period.
- All of your credit card debt can be consolidated onto one card for an easy payment.
- The initial teaser rate may not actually be as low as advertised if you are not the best-qualified borrower.
- There can be a balance transfer fee for your debt consolidation.
- The interest rate can jump if you are late once. For example, a 1.9 percent interest rate can jump to 21.9 percent if you are late even one time.
- You can quickly run up more debt on your old cards that now have zero balances. Then you will have several cards with large balances, which translates into large interest payments.
Another option for debt consolidation is to use your home equity to in the form of cash-out refinancing. This involves refinancing your mortgage to one with a higher principal, so that you can access your home equity.
Pros:
- Since the loan is your mortgage, it will have a much lower interest rate than you had on your credit cards.
- The interest is likely to be tax deductible.
- Your monthly debt obligations will be less. Because your credit card debt is now consolidated in your mortgage, you pay much less in interest, which is a cost savings. Also, depending on the mortgage that you get, you may be able to stretch out your term so your monthly mortgage payments do not increase.
- The loan is secured by your home, so if you default you can lose your house.
- The home equity that you use for debt consolidation is no longer available to you if you sell the home.
Home equity loans are also called second mortgages. Like cash-out refinancing, they also give you access to the equity in your home, which can be used for debt consolidation. They have a fixed rate for the term.
Pros:
- Since the loan is secured with your home, the interest rate is much less than what you typically get with a credit card.
- The interest is likely to be tax deductible.
- Your savings in interest should mean that you have to spend less money on your monthly debt obligations.
- Although the interest rate should be lower than you would get with credit cards, it is higher than a first mortgage.
- The home equity that you use for debt consolidation is no longer available to you if you sell the home.
- The home equity loan must be paid off if you sell the house.
If you do not own a home or do not want to use your home equity for debt consolidation, you can obtain a personal loan instead.
Pros:
- The interest rate is lower than you would pay with credit cards.
- A personal loan is usually easy to obtain.
- Since a personal loan is an unsecured loan, the interest rate is higher than it is with cash-out refinancing or a home equity loan.
- The overall cost of the loan is high since the interest is high.
