Different Ways to Consolidate

People ask me "What's best way to consolidate debt?" and of course "What's catch?" Well, it just really depends on situation. There are all sorts of ways to do it and some folks get really creative too. I'll tell you about some of more popular ones and pros and cons you get with them.

Just remember because it looks good doesn't mean it is. The advertisers now a days are pretty good about disguising those higher interest loans with payments that go on forever because all you see is lower payment. So try and ignore that sweet pitch for a lower payment if it means you just dug yourself a bigger hole and put yourself deeper in debt.

First things first. Let do a little wake up call. If you are just barely trending water because you are in to much debt, just realize that not all these options will work for you. And some times, no of them will. If that's you, keep your head up high and don't drown. Many people can really cut their debt without ever consolidating.

And don't forget, if you do decide to get a debt consolidation loan, don't think fairy god mother is going to make thing all better. After all, once you do a debt consolidation you will still have to make a payment until that loan is paid off.

Home Equity Loans

If you have been paying on your home for a couple of years, put a pretty big down payment when you got it and are lucky enough to be in one of those areas of country where home values shot through roof, you may be sitting on little piece of freedom in form of equity in your home. To get to this little nest egg you either have to sell your home or borrow money against it. And so enters home equity loan. Another little thought...If you still owe a considerable amount on your home, IGNORE ads for home equity loans for more than value of your home. Not only are they very expensive but also very dangerous. And if you are still considering one of those loans Contact Me and I'll be more than happy to give you a hundred thousand reasons not to.

If you want to be a stickler about it there are actually two different types of home equity loans. The first, which is my favorite, is home equity line of credit (HELOC), it uses equity in you home like a credit card. You can use a little as you want or up to your limit, and once you pay it down enough you can keep on doing it. It's very useful when done correctly because most of them have some sort of interest only option which will give you greater flexibility. Hence, that's why it's my favorite. And other type is a fixed amount, rate and term. Your payment stays same all time. Just to make this simple when I talk about a home equity loan it will refer to both of these types.

Many people use home equity loans for debt consolidation. They will often get a pretty good interest rate, and since you can deduct interest payments on their taxes, making "real" cost even lower. But, of course there is a down side, you must use your home as collateral. Which is just a fancy term to say if you miss your payment I can take your house. And There goes roof over your head...Literally!

Consider a Home Equity Loan for Debt Consolidation if:

You won't be leveraging your home so much that you are borrowing pretty close to, or more than, current market value of your home.

You can pay it back in 5 years or less

You are in debt because of unusual circumstances, like an unexpected accident or hospital bill, but for most part you have excellent money management skills.

DON'T use a home equity loan for debt consolidation if:

You are going to have to borrow 100%-125% of your home's value. Interest rates are high on these types of loans not to mention you will be stuck in your house and won't be able to move for any reason for a very, very long time.

Your marriage is on rocks. Separation and divorce may not make it possible for you to remain living there. Especially if you have a court order to move. Not to mention you would loss a great deal of money if you had to short sell it (You would still have to pay off mortgage before you can sell it)

Now if you think that you are in debt because you just don't make enough money...well, I am surprised you made it this far. With that type of thinking as soon as you pay off your credit cards you will just find another excuse to charge them again, then your home will really be at risk.

Credit Cards

Consolidating your debt on a credit card comes off as a pretty bad idea; however it can actually be a great resource if done correctly. Credit cards sometimes offer some of lowest interest rates around and they are easier to acquire than most debt consolidation loans, but best part is that they don't require collateral like your home equity line does. That is an important thing if a bad situation pops up and catches you unprepared. You can either call your current card company and find out what their interest rates will be on a balance transfer to their card, or if you are like me you get tons of offers in mail for companies offering to consolidate your debt onto a credit card you can choose best one. A big warning here...READ THE FINE PRINT! Make sure if you transfer balance it will help you not hurt you. I give more tips on how to handle this in my FREE newsletter so make sure you sign up.

Consider using a credit card for debt consolidation if:

You can get a lower interest rate; make sure it is a fixed rate and not just a low intro rate, that's how they get you. Please Read The Fine Print.

You never pay minimum payment, and they tease you with a really low one, and you pay as much as your budget will allow each month to get rid of debt quickly, after all that's what this is for.

You close out accounts that you are paying off so that you don't go on a shopping spree. A word of caution if you close too many account it will hurt your credit score.

Don't use a Credit card for debt consolidation if:

You can only get an interest rate that is higher than what you have because you have bad, dinged, or a bruised credit history.

You are just so addicted to your credit card that you can't bear thought of getting rid of one or more of them.