Consolidating debt usually means combining all your different credit accounts and loans into one loan with an overall lower interest payment. In addition to saving money on interest, debt consolidation is also convenient, because it leaves you with only one payment to keep track of instead of several. If you are looking to consolidate debt, there are a few loan options available.
Borrowing Against Home Equity
If you have a significant amount of equity in your home there are a couple of different loan options you could use to consolidate debt. One option is to do what's called a "cash-out" refinance. Say you owe $50,000 on your mortgage and your home is worth $100,000. You could refinance and cash out all but 20 percent of your equity. This would leave you with a mortgage of $80,000 and $30,000 to pay off your debt.
Another way to use your home equity to consolidate debt is to take out a home equity loan. This is essentially a second mortgage. Assuming the same scenario in which you owe $50,000 on a $100,000 home, you could get a second mortgage for $30,000 to pay off your other debt.
Credit Card Balance Transfer
If the debt you want to consolidate is mostly small, such as credit card debt or perhaps a car loan, you could consolidate by transferring it all to one credit card. Credit cards often offer low initial rates on balance transfers, giving you up to 12 months and sometimes longer to pay off the balance before higher interest rates kick in. This can save you a considerable amount on interest costs. One drawback to this option is that credit card companies usually charge a fee to transfer balances that can be as much as 5 percent of the balance you are transferring.
Personal Loan
If you don't own a home, or lack sufficient equity, and you either can't or don't want to consolidate debt on a credit card, a personal loan may be an option. Personal loans carry higher interest rates than home equity loans, according to Lending Tree, but they may still be lower than your credit card interest rates. The loans also are often unsecured, meaning they are not backed up with any collateral, which means you will need a fairly good credit score to qualify. Pat Curry of Bankrate.com suggests applying for a loan at a credit union because they often have lower interest rates and fees than banks.
Borrowing From Investments
If you have a 401k account or a whole life insurance policy, you may be able to borrow from these to pay off debt. Inquire at work about whether your 401k provider offers loans. The advantage of borrowing from your 401k is that you are paying the loan back to yourself, with interest. The disadvantage is that you lose the earning power of the money you take out, which could lower your retirement nest egg in the long run. A 401k loan also has short repayment periods, with five years being the max, according to Bankrate.com.
Borrowing from a whole life insurance policy may be a better option. You can borrow against the cash value of the policy and have an unlimited time frame in which to pay it back. If you die before the loan is paid back, your insurer will subtract the balance from the insurance benefit it pays.
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