Debt Consolidation Loan Sources

Today, the average American household is carrying an average of $10,000 in credit card debt. This debt is more often than not spread among numerous credit cards, each with its own payment dates and requirements. And with most credit card companies having recently doubled their minimum monthly requirements to approximately 4% of the unpaid balance of the account, paying off several credit cards at once may have just gotten considerably more difficult. The sum of those minimum payments could be more than many families can afford to pay. So, what can be done to ease this situation?

Of course, the debts can all be incorporated into one. A debt consolidation loan accomplishes this by using the proceeds from one loan to pay off a number of other loans. The borrower then only needs to make one monthly payment. Depending on the source of the consolidation funds, that single payment is often smaller than the sum total of the debts that were paid off, thus freeing more spendable cash for the borrower.

While there are many companies that specialize in providing such loans, there may be other sources of funding at your disposal. The interest rates and terms of these sources can vary greatly. Depending on your own personal financial circumstances, some of the choices may be better sources for you than others.

If you own a home you could use a home equity loan or line of credit (HELOC) to borrow against the equity that’s been accrued. Home equity loans are available from many lenders at affordable interest rates. The interest is also virtually always tax deductible on loans of up to $100,000. This is a major advantage when consolidating credit card and personal debt. Be aware, however, that home equity loans and lines of credit use your home as security for repayment of the debt. That means that if you default, your home could be at risk of being taken.

If you have a retirement plan or a 401(K) plan at your place of employment, you may be able to borrow from it. The interest rates can be quite favorable, because you’re basically borrowing your own funds. The downside here is that your money is not earning interest and growing for your retirement during the time that you have it borrowed, and this lost earning potential is gone forever.

If you have a life insurance policy that accumulates cash value, you may be able to borrow against that policy. This also can have financial implications down the road. Be sure to consult your insurance agent for details.

Family and friends may not always be the best choices for a loan, but they’re there nonetheless. Just keep in mind that many valuable relationships have been ruined because of money. If you do borrow from friends or relatives, make sure that you draw up a contract (for the protection of both parties) and that you treat them with the same respect that you would another lender. Pay them back in a timely manner and then thank them for their favor toward you.

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