Debt consolidation can help you get control of your finances. There are several different options when considering a consolidation loan. Many people choose to use their home as collateral on the loan to get a lower interest rate than other options. This is generally done through a second mortgage.
Debt Consolidation Loans
The advantages of a debt consolidation loan is that it can be used to pay off several smaller loans and give you one monthly payment; the interest rate is often lower than the original loans, which will make it easier for you to pay off debt. If the payments have become too much for you, you may have the opportunity to "rest" the length of the loan, which means you can choose a lower monthly payment. However, that will extend the amount of time it takes to pay off your loan and increase the amount you pay in interest.
Dangers of Using a Second Mortgage for Debt Consolidation
When you obtain a second mortgage you cash out the equity in your home and can use it to pay off other debts. However, if the market were to drop you may own more than your home is worth, and you may have a difficult time selling it in the future. Another problem with a second mortgage is that you are putting your home at risk because you are tying debt to it. If you were to default on a second mortgage loan your home could go into foreclosure and you could lose it. However, if you were to keep the smaller loans separate from your home loan and you defaulted, your home would still be safe.
Other Alternatives
An alternative to using your home as collateral for a loan is to choose something else such as a boat or car. You can also take out a loan with no collateral or a signature loan as a consolidation loan. These loans usually have a slightly higher interest rate than a second mortgage, but the benefit of protecting your home outweighs the higher rate. Another alternative is to make a debt payment plan and work to pay off the debts by applying extra money toward the loans each month. A credit counseling service can help you pay down debts and address your spending issues by setting up a budget.
Dangers of Debt Consolidation
Debt consolidation only addresses the problem of too much debt without looking at the behaviors or the situations that caused it. Many people find themselves able to consolidate debt only to have their credit cards maxed out again in just a few years. If you choose debt consolidation, it is highly advisable to stop using your credit cards and start following a specific budget to avoid making the situation worse.
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