Debt Consolidation is an overused phrase that you have undoubtedly heard on countless radio and television commercials. Many credit counseling services tout themselves as debt consolidation agencies when that is not really the truth.
Debt Consolidation is the process of obtaining a single loan to pay off all your smaller balances. The only way debt consolidation makes sense is if you are able to obtain a loan with a lower interest rate than your current accounts and a shorter payoff time. There are two types of debt consolidation loans available, secured and unsecured.
A secured debt consolidation loan is the best and most common option. This type of loan will usually be taken out against equity in your home (also called a second mortgage). If you want to calculate the equity you have available in your home, you can take your home’s estimated value (use zillow.com for a quick estimate) and multiple it by 80%. Subtract the amount you owe on the home from that figure and you will have your available equity.
An unsecured debt consolidation loan is much harder to come by. These loans are not backed by any collateral and usually carry high interest rates (18-20% range is common).
The biggest disadvantage to debt consolidation is that it does not reduce the balance of your debt. If you have $50,000 in debt, you are going to be paying back that total amount plus interest.
Who should consider debt consolidation? People who have enough equity in their home to cover their debts.
