Consolidating Your Loans with Home Equity

Consolidating all of your loans, including home equity loans, have many possible benefits but also several drawbacks. A consolidation is basically the process of taking out a new loan in the sum of all of your debts. This new loan is used to pay off, and hopefully settle down, your current debts. Then, you will pay only the new lender each monthly. The goal is to get this new loan at a more affordable monthly payment and perhaps a better interest rate than you current loans.

Benefits of Consolidation

The main benefit of consolidation is the way it can be used to avoid bankruptcy and default. If you do not believe you will have the ability to pay off your loans at their current rate, then you may feel trapped with the debt. Instead of simply ignoring collections agents and defaulting on the debt, you can be proactive to resolve the issue. Closing all of the credit lines will immediately ease the stress of meeting payments. For most people, making just one payment each month is far more manageable than paying multiple creditors. Further, the new monthly payment should be less than the sum of the payments previously.

Drawbacks of Consolidation

Consolidation will go against your credit score. Each lender that you settle with, including your home equity lender, will report the fact you modified your contract. This means multiple red flags on your score all at once. More so, not every creditor will be willing to work with you to settle your remaining debt. Some may charge you high prepayment fees. In the end, the consolidation could end up costing you far more money over time than simply paying off the debt on time would have.

When to Consolidate

Consolidation, due to these drawbacks, should always be used as an option of last resort. Electing to consolidate simply to reduce your debt burden is not a smart financial decision. Consolidation should be considered if you cannot meet the demands of your debt based on your income and living expenses. The only exception is federal student loan consolidation, which has relatively few penalties in exchange for a host of benefits. On the whole, though, consolidation should only be used as a bankruptcy alternative. If you are heading toward bankruptcy, then consolidating your debts may be the last chance you have to avoid the highly detrimental results of defaulting on all of your debts through the legal process of bankruptcy.

When to Avoid Consolidation

Consolidation should not be considered as a solution to a high amount of debt if you can pay the debt off through other means. Budgeting, closing credit lines and taking part-time jobs may permit you to pay off your debts on schedule. If this is the case, then you will realize a much greater benefit through these extra efforts than by taking out an even larger consolidation loan. Succeeding in paying off your debts according to your contracts will boost your credit substantially even if you have been late on your payments in the past.

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