Debt consolidation is the term used to describe the process of combining a number of debts or accounts and paying off all of your smaller debt with one larger loan. It may be the best option for you if you have several credit cards with high interest rates or if you are paying only the minimum due on every account each month because you are over-extended. A debt consolidation loan can help you reduce both your interest rate and the amount of money you will be paying over the period of time it will take you to pay off all your debt.
If you own a home, obtaining a home equity loan for the purpose of debt consolidation has many benefits. The interest rate tends to be much lower than a typical credit card. Also, the payments are fixed so you can budget easier without having to worry about the payment suddenly increasing.
The biggest benefit of a home equity line of credit is that interest on a home equity loan is tax-deductible, while interest on credit cards and installment loans is not. You will receive a tax credit on your return next year for any mortgage interest you paid this year, whether that is from your primary mortgage or a debt consolidation loan tied to the equity in your home. Just make certain that you aren't tempted to use the available credit to increase your debt or it will completely defeat the purpose of what you are trying to accomplish.
Another possible form of debt consolidation is finding a credit card with a zero percent balance transfer fee. If you go this route, make sure you close your other account and understand how the interest on the balance transfer is calculated. It wouldn't be to your advantage to have the balance transfer fee waived if the interest on the new balance is higher than what you are already paying.
A debt consolidation loan also provides you with the convenience of having only one monthly payment and one due date to remember, which is a huge convenience for those that are struggling to keep track of due dates and payment amounts. This also makes budgeting easier. If you are saving a lot of money by having the debt consolidation loan instead of the other loans, you can always use it to make extra payments toward the principal, which is always a good idea anyway, and get it paid off that much faster.
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