Debt consolidation loans are one of the common ways to alleviate some of the burdens that come with high debt balances and high interest rates. Your options for consolidating debt generally include unsecured types of personal loans or loans secured with your property as collateral.
Debt Consolidation Loan Basics
Along with home equity loans, personal loans and debt help solutions are options to consolidate debt. Unlike a home equity loan, a personal loan is typically unsecured, meaning you do not have to put up collateral to get one. You can use it to pay off other loan and credit card balances. Lenders base personal loan rates largely on your credit score. Personal loan interest typically has no tax advantages. Debt help solution providers work with troubled borrowers on a plan to get out of, or strategically pay down, debt. This may include help with getting a debt consolidation loan.
Debt Consolidation Loan Benefits
Reducing the number of creditors you owe has psychological, as well as financial, benefits. Owing many creditors money is overwhelming. Making one payment to one creditor is less stressful and more manageable. When you consolidate, your personal loan or home equity loan typically has a lower interest rate than the average of your higher interest rate credit cards. This saves you money over time and likely means a lower monthly payment obligation, which allows you to pay extra toward principal.
Home Equity Basics
A home equity installment loan is a fixed loan secured by your property. An installment loan and home equity line of credit are two ways for you to borrow against the equity value in your home. Along with debt consolidation, a home equity can be used for home improvement, college education, medical bills or major purchases. The loan is typically amortized like your first mortgage with a 10- to 15-year repayment period. A home equity loan increases your risk of property loss by further leveraging your home as collateral.
Home Equity Benefits
Despite the risks, home equity installment loans have some significant benefits relative to unsecured personal loans as a possible debt consolidation tool. Interest savings are the most significant of these. A secured loan typically nets a much lower interest rate, especially if your credit score is poor. With the reduced rate, your monthly payment is lower and the interest on loans secured by your property is usually tax deductible. This reduces your taxable income, further lowering your effective interest rate.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.