Debt consolidation may simplify your financial state by collecting all your debts under one account. However, it's important to be careful in choosing a consolidation loan. The three different options offer different forms of relief, each at their own cost. Make sure you understand all the fine print before accepting any form of credit card consolidation.
Home Equity Loan
Home equity loans or lines of credit allow you to borrow against the value of your property. These are secured by you home, which means that they generally have lower interest rates than unsecured loans, but you risk losing you home if you don't make payments. The Federal Reserve explains that the amount you may borrow is typically calculated by taking 75 percent of the appraised value of the home and subtracting the balance owed to come up with a potential line of credit. Other considerations, including your income, debt, credit history and financial obligations, may also come into play in calculating the lender's final offer.
Zero Percent Credit Card
Credit cards with introductory interest rates of zero percent are meant to attract new customers. In using a zero percent card to consolidate your credit card debt, consider whether you'll be able to pay off that debt within the introductory period. Otherwise, you may end up with more debt and an even higher interest rate. Also, keep in mind that opening a new account every six months to a year will end up negatively affecting your credit score, so continuously opening cards just to take advantage of introductory offers will only hurt you in the long run.
Consolidation Loan
Consolidation loans are unsecured loans that gather up all your debt into one account. Rather than paying five or six creditors with different fees and interest rates, all your debt will have the same interest rates and fees because they'll all be under the same loan. While this is good news for convenience and ease of payment, it may not actually mean that you're saving money. Oftentimes, consolidation loans are advertised at very low interest rates, but you need to have extremely high credit to take advantage of those rates.
Considerations
Keep in mind that consolidation loans mean you're fighting fire with fire---or, in this case, fighting debt with more debt. It's vital to be committed to actually paying off your debt so that you're not just looking for temporary relief from the burden of watching your debt creep up toward your credit limits. According to a Bankrate.com article, more than 70 percent of those who take on consolidation loans end up with the same or more debt within two years. Avoid becoming part of that statistic by working out a reasonable budget beforehand to accommodate your monthly payments and all your expenses, so that you don't have to contribute any more to your debt.
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