September 12th, 2018 7:07 AM by Jackie A. Graves, President
If you feel
like you’re drowning in debt, you’re not alone. According to Experian’s State of Credit
report, the average household has $24,706 in non-mortgage debt. That
means things credit cards, medical bills or car loans. With such a heavy debt
load and high interest rates, digging yourself out from that debt can be challenging.
debt consolidation can be a big help. And, if you own a home, tapping into your home equity instead of taking
out a debt consolidation loan can be a smart choice. Learn more about how debt
consolidation works and how to decide if it’s right for you.
is debt consolidation?
with debt consolidation loans, you work with a bank or other financial
institution to take out a personal loan for the amount of your current
outstanding debt. Once the lender approves you and disburses the loan, you use
it to pay off your old debt.
several benefits to consolidating your debt.
You’ll have just one payment
previously had medical debt, credit card debt, a personal loan and a car loan,
you know how frustrating and confusing it can be to keep track of multiple
payment due dates. With so many to juggle, it’s easy to forget and fall behind.
consolidating your debt, you have just one payment, rather than several. That
makes it simpler to stay on top of your debt.
You’ll know when your debt will be paid off
cards and other forms of debt, high interest rates can cause your debt to
balloon. And because credit cards are revolving forms of debt — meaning you can
continue using them and add to your balance — coming up with a payoff date can
consolidation loan streamlines the process. When you take out a loan, you have
a set repayment term, such as three to five years. You can circle that date on
your calendar and know that’s when you officially will be debt-free.
You can get a much lower interest rate
interest rate on variable-rate credit cards is 17.32 percent as of Sept. 5, according to
Bankrate data, though they can often be much higher. With such a
high interest rate, your debt balance can grow over time and you can end up owing
far more than you originally charged.
consolidating your debt, you can lock in a much lower interest rate. For
example, you could consolidate your debt with a home equity loan — the current
average interest rate on these loans is just 5.77 percent, according to
Bankrate data. That way, more of your monthly payment goes toward
the principal rather than interest charges.
You can save money
consolidation can help you save a substantial amount of money. With a lower
interest rate and set repayment term, the savings can be significant.
pretend you had $10,000 in credit card debt at 15.54 percent interest. If you
made only your minimum payments, you’d end up paying a total of $14,445. Thanks
to interest fees, you’d have to pay an additional $4,445 to pay off your debt.
say you consolidated your debt to a five-year home equity loan and qualified
for a 5 percent interest rate. By the end of your loan, you’ll have repaid just
$11,323. Taking just a few minutes to consolidate your debt would help you save
Bankrate’s debt consolidation calculator to find out
how much you can save.
to consolidate debt with home equity
Taking out a
debt consolidation loan is one of the most common ways to consolidate debt.
However, if you own your own home, there might be another way: You can tap into your home’s equity to better manage your debt.
equity is its current value minus what you owe on your home. When it comes to a
home equity loan or home equity line of credit (HELOC), you can typically
borrow up to 80 percent of the equity. Depending on the lender, you can
sometimes borrow up to 85 percent of your home’s equity.
if you have a $300,000 home and owe $200,000 on it, your home’s equity is
$100,000. At 80 percent cumulative loan-to-value, the total amount of
outstanding borrowing would be limited to $240,000 ($300,000 x 0.80 =
$240,000). You must retain 20 percent equity in the home, which is $60,000
($300,000 x 0.60 = $60,000). So, subtract the amount you have to retain from
your total equity, and you’d be able to borrow $40,000 ($100,000 - $60,000 =
A HELOC is a revolving line of credit
rather than a lump sum loan. That means you can use the HELOC again and again
as needed. A HELOC can give you greater flexibility for your future needs
rather than a one-time, lump-sum debt consolidation loan. And, HELOCs are
secured types of debt, meaning that your home secures the loan as a form of
collateral. That difference can help you get a much lower interest rate than
you’d get with other forms of loans.
If you decide
to pursue a HELOC, you can apply for one with your local bank, credit union or
to consider before tapping into your home equity to consolidate debt
forward with an application, there are some pros and cons of HELOCs to keep in mind.
HELOCs take time
consolidation loans in the form of personal loans tend to be very fast. You can
usually apply online within a few minutes, get approved nearly instantly and
have the money deposited into your bank account within a few days.
to take more time. It’s almost like a second mortgage on your home, so it takes
a lot more paperwork and time to process before you can access your money. If
you need the money right away, a traditional debt consolidation loan might be a
better option for you.
HELOCs can be more risky
consolidation loans are usually unsecured forms of debt, meaning that you don’t
need to put down any form of collateral. If you fall behind on your payments,
you can end up in collections and your credit score can be ruined, but your
creditors can’t seize any of your assets or valuables.
differently. Because they’re secured by your home, missing your payments has
more serious consequences. You could even lose your home. Only move forward
with a HELOC if you can comfortably afford the payments.
There can be hefty fees
loans typically charge closing costs, while HELOCs typically charge low or no
the bank you work with, you could face added charges like closing costs,
appraisal fees and annual fees, all which can add to the cost of your loan.
When shopping around for a lender, make sure you understand the closing costs
each company charges and how it’ll affect how much you borrow.
You don’t get the tax benefits
you could deduct the interest you paid on a home equity loan or HELOC on your
taxes, regardless of its use. However, the new tax law changed that. Now, you
can deduct only the interest paid on your loan if you use the money to buy,
build or renovate your home. Using a HELOC or home equity loan to pay off
credit card debt does not qualify for the tax deduction.
vs. debt consolidation loans
If you decide
that a HELOC is right for you, it’s a smart idea to shop around
with several different home equity loan lenders to ensure you
get the best rates and terms.
whether you select a HELOC or a debt consolidation loan, make sure you have a
plan in place to pay off the debt as quickly as possible and avoid racking up
credit card debt in the future. By coming up with a strategy, you’ll use your
loan or HELOC wisely and set yourself up for a more secure financial future.
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