Repositioning debt can help individuals clean up credit problems and make larger principal payments. By evaluating several repositioning options, it may be possible to avoid high interest rates. As the overall interest rates on debt decline, more of each payment is used toward paying down balances. Because many people with high debt have credit problems, it may be best to evaluate options using already obtained credit options.
Balance Transfer
Many credit cards offer balance transfer options. Although this may lower the interest rate owed on debt significantly, credit card companies normally charge a one-time transaction fee to transfer debt to a new card. Persons with good credit might be able to secure a low-interest balance transfer credit card and roll over debt to the new card.
Secured or Unsecured Loan
Credit unions and banks offer consolidation loans. These allow individuals to cut up credit cards and work toward paying down debt. These institutions will check credit before loaning money, and interest rates vary widely. For lower interest rates, secure the loan to an asset such as a boat or car. Compare the new interest rate to the current rate being paid before performing this transaction.
Home-Equity Loan
If there is equity in the cardholder's residence, a home-equity loan may be a viable option to clean up debt. Because they're secured by the home, home-equity loans are generally at lower interest rates than unsecured loans and credit cards. The debt may be tax deductible. Payments are based on longer periods of time, so the minimum payment due may be lower. A large potential negative to this strategy is that if the loan remains unpaid, the borrower could lose his home.
Mortgage Refinance
A full refinance of a home using equity in the house will give a borrower a lower interest rate than a home-equity loan and a longer payment schedule. The fees for a mortgage are usually higher than for a home-equity loan, and borrowing against a home can be dangerous if left unpaid. However, the loan is tax deductible and payments on debt are lower than for any other type of popular repositioning strategy.
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