How to Consolidate Loans and Credit Card Debt

How to Consolidate Loans and Credit Card Debt

Most consumers consolidate loans to reduce interest rates and lower monthly installments. In certain situations, consolidation can be a good option for reducing overall debt. However, prior to applying for consolidated financing, borrowers should understand the advantages and disadvantages of this financial strategy.

Borrowers wanting to consolidate loans must apply for a new loan. Funds are used to pay-off high interest loans or provide cash to borrowers. Obtaining loan consolidation approval can be challenging unless borrowers have exceptional credit scores and a solid history of paying loans on time.

It is a good idea to obtain a current credit report to review fico scores and determine if credit blemishes exist. Under the Fair and Accurate Credit Reporting Act (FACT) consumers are entitled to one complimentary report annually which can be obtained at AnnualCreditReport.com. Credit reports are provided from each of the three major credit reporting bureaus.

Nearly all types of loans can be consolidated. The most common include home mortgage, automobile, and student loans. Graduates carrying federal student loans generally cannot consolidate student loans with other types of loans. Students should consult with a college loan consolidation advisor to determine available options.

When homeowners enter into loan consolidation they use their home equity as collateral to secure the loan. The most common consolidation loans for real estate include home equity loans and home equity line of credit (HELOC). Home equity loans are second mortgages, while HELOC provides an open line of credit which can be used on an as-needed basis.

Home equity loans are typically charged a fixed rate of interest and monthly payments stay the same throughout the duration of the note. HELOC accounts are usually charged with adjustable interest rates, with interest only being assessed when funds are used.

Home equity loans can place real estate at risk for foreclosure, so careful consideration must be given to potential consequences. Since the property is used as collateral, mortgage lenders can proceed with foreclosure action if borrowers default on home equity loan payments, even if first mortgage payments are in good standing.

Both HELOC and home equity loans can help borrowers eliminate high-interest loans and pay off debts more quickly. However, this type of financing can deliver serious consequences if borrowers become delinquent with payments or default on the loan.

When borrowers consolidate loans their monthly payment should range between 10- and 20-percent less than the combined balance of loans which will be paid off. It is important calculate the true cost of refinancing before taking out a consolidation loan. The main objective is to pay off high-interest loans and reduce monthly payments.

One option to loan consolidation is cash-out refinancing. This option involves applying for a new home mortgage loan which provides cash to pay off credit cards and unsecured loans. Cash-out refinancing is generally reserved for property owners with substantial home equity.

These are a few ways to consolidate loans. It is best to consult with a financial planner or loan advisor to determine all available debt reduction options. At minimum, spend time conducting online research to comparison shop lenders and obtain the lowest interest rate.

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