Choosing Between Debt Consolidation Options

When most of us finally decide that we want to get out of debt, the first thing many of us think about is “debt consolidation.”  However, with the many different companies and services promising to help us, this can be a very confusing option for us.  There are actually several different ways to consolidate your debt, and each of these debt consolidation options comes with it’s own pros and cons.

With that in mine, I thought I’d help spell out and explain some of the various options for consolidating debt.  It is important to remember that each situation is different, so debt reduction strategies that are best for one person may not be the best option for you.

Home Equity Loans and Refinancing

Before the recent housing and credit crisis, refinancing and/or taking out a home equity loan (also sometimes referred to as a second mortgage) was one of the most common ways to consolidate and reduce debt.  The benefits of this method were pretty obvious.

Rolling debt into a home equity loan, or refinancing and using home equity to pay off debt, usually results in lower interest rates and lower monthly payments overall.  For people on a tight budget, this often seemed like a great idea. However, as the recent housing and economic collapse proved, there were some drawbacks that many people did not consider.

The biggest drawback to this option is that it turns your unsecured debt into a debt that is secured by your home.  In other words, with this type of unsecured credit card debt consolidation you are now at risk of losing your home if you cannot pay off the debt, where before your home was not at risk.

Another thing that few people consider is that, despite the lower payments and interest rates, many people actually pay more money in the long run.  The payments on these loans can be stretched out over as much as 30 years if you refinance your home, meaning you could still pay more money in interest than you would have.

Balance Transfers, Unsecured Loans

Another commonly used option is transferring balances to a credit card or using an unsecured loan.  These basically amount to the same thing, since unsecured loans are practically the same as credit cards in terms of interest rates and payments, and both are unsecured.

These may be convenient and simple options for many, and if you can find a loan or card with a fixed, low rate and with low or no balance transfer fees, then this could be a great option for you.  Unfortunately, it’s not always so simple.

Most credit cards advertise low teaser interest rates that go up after 6 months or a year.  Most people will not pay off the debt that quickly.  If you have to pay balance transfer fees on top of that, then you may be worse off than you were originally.

The biggest problem with this option is that many people are unable to qualify for a low enough rate for the long term or, if they can, they aren’t granted enough credit to consolidate all of their debt.

Other Consolidation Options

Many people looking to consolidate unwittingly get roped in by debt negotiation services.  We have covered how these debt negotiators operate in several other articles, but for now all I will say is that this is NOT a real consolidation option.  If you are considering this option, you should first research debt settlement pros and cons so that you at least know what you are getting in to.

Another possible debt reduction plan that might be considered is a debt management plan.  This is also not a true consolidation, but it does offer one consolidated, lower monthly payment as well as lower interest rates.  These plans are also not for everyone, and you should first speak with a qualified, accredited credit counselor before considering this.

You can also look into local options for help, such as Ohio debt consolidation for residents of Ohio.

This entry was postedon Friday, August 13th, 2010 at 3:24 pmand is filed under Tags: credit counseling, debt consolidation, debt reduction plan, debt settlement, pros and cons.You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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