Debt Consolidation

There are many reasons that you may be considering debt consolidation. This is typically undertaken to reduce high interest loans or consolidate multiple loan payments into one easy payment. Usually resulting in lower monthly payments unless the loan term is shortened for a quicker payoff.

Depending on your situation, there are several approaches to consider consolidate debt, we will review them below to help you determine the best debt consolidation solution for you. When considering which approach to take keep in mind:

There will be trade offs for each, which are explained below, but to determined which one is best for you it is a good idea to take a few minutes and think about what you are looking to achieve short term (pay this bill) long term (be debt free or buy a house), this will help you choose the right one for your needs and budget.

There is no fee or obligation for applying for consolidation loans, therefore it is a good idea to shop around a bit and get the best rate.

Make sure you budget appropriately, depending on your goals your payments may increase, for example if you are looking to be debt free in three years you may consolidate ten year loans into three years, but make sure you can make the payments.

Home Mortgage
Assuming you own a home, vacation home or any form of real estate, you may use that as collateral for a debt consolidation loan or take out a first or second mortgage against the real estate. Advantages to this are that you will most likely receive a better rate then with other consolidation loan approaches. Also the interest may be tax deductible, see your accountant or review the tax laws for details. Disadvantage is that if you cannot make the payments you may lose your real estate which in this case could be your home.

Equity loans
There are other forms of equity that you can use to take out a loan against for debt consolidation. Any asset you have, that is worth more than you owe on it, such as a car is will work. But it could be a boat, expensive jewelry, etc. Advantage to this is that you will most likely qualify for a lower rate than if you took out an unsecured loan. Disadvantage to this is that if you cannot make the payments you may lose the asset. Also you will not be able to sell the asset until you have paid off the loan or made arrangements with the lender since they will now have a lien on your asset.

Personal loans
If you do not have or do not care to use assets to secure your loan you may consider a personal or unsecured loan. These loans are based on your credit reputation and will be harder to get for those with lower credit scores. They will also have higher interest rates then secured loans. On the positive side your assets are not at risk if you are unable to make the payments.

Prosper
Another option for unsecured or personal consolidation loans, gaining in popularity, is Prosper. This is peer to peer lending which is a new to many people, but appears to be working well. In many cases this will yield lower rates then going to a bank for an unsecured loan. Definitely worth a look for unsecured loans, you can find more information in our Prosper Loan section.

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