When you have several debt accounts that are maxed out, it may feel like you have a mountain of debt that can never be overcome. While it can be discouraging, you can explore options to get past it. One option that many people choose to pursue is debt consolidation. Debt consolidation can be beneficial, but you have to be careful with the process.
Debt Consolidation
The process of consolidating your debt involves putting all of the debt from multiple accounts into one place. This can be done with a variety of techniques, including taking out a loan or transferring all of your balances to a single credit card. Putting all of the debt into one account allows you to make only one payment every month. One of the primary goals of debt consolidation, though, is to lower the interest rate.
Home Equity
One way that many people consolidate their debts is to take out a home-equity loan or a home-equity line of credit. With both of these approaches, you borrow money from the equity in your house to pay off all of your debt accounts. Then you make the one monthly payment to your home equity loan. The benefit of using this technique is that you can deduct the interest that you pay from your taxable income. The drawback of this strategy is that you are risking your home for short-term debt.
Debt Relief Companies
If you are interested in getting help with your debt consolidation, you may consider consulting with a debt relief company. Many companies advertise that they will be able to help you consolidate your debt and get one low monthly payment. While some of these companies can be helpful, many of them are not providing what they claim. For example, some of them use a debt management plan for this service. This involves paying the credit counseling company one payment every month and then they pay all of your creditors for you. While you are only making one payment per month, this is not actually consolidating your debt.
Risky Solutions
If you do not qualify for a traditional home-equity loan, you may be attracted to some alternatives to get the job done. If this is the case, you need to be careful with which options you consider. For example, transferring all of your accounts onto a single credit card can be very risky. Even if you have a low introductory rate, you may not be able to get all of the balance paid off by the time it runs out. Another mistake that some people make is to take out a hard-money loan. This is a loan from a private lender at a very high interest rate. Even though you may be able to consolidate your debt with this type of loan, you will have to pay a great deal of interest on it.
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