Credit card debts can snowball into an overwhelming pile. With high interest rates and the way balances are figured, it can be almost impossible to pay off big credit card debts a little at a time. Combining several debts into a single loan can help. You can do this with a commercial debt consolidation loan or by using the equity in your home.
Combining Cuts Interest
Credit card companies charge interest rates up to 25 percent on unpaid balances. Home equity loans will have a much lower interest rate, usually less than half of what you're paying for a credit card. Combining $15,000 worth of loans at 20 percent into a single loan at 9 percent will save you at least half the monthly interest, so you can pay more in order to reduce the balance. You can get a debt consolidation loan not secured by home equity but the interest rate usually will be higher because it is an unsecured loan.
Equity Loans Save Taxes
A home equity loan offers advantages over some other debt consolidation loans. While any loan that combines several debts into a single loan with one monthly payment is an improvement, the interest on a home equity loan can be deducted for income taxes, adding to your savings. You also can vary the term of a home equity loan, so you can take 5 or 10 years to pay off debts, although shorter terms are better. A non-secured consolidation loan will usually have shorter terms.
Weigh Loan Against Equity
Find out how much equity you have. That's the difference between the value of your home and what you owe. If you have $15,000 in credit card debt and $25,000 in equity you can handle a home equity debt consolidation loan. Never get a loan that pushes you past the value of your home or you'll put your home at risk. If you don't have enough equity to pay off all your credit card debt, get an equity loan big enough to eliminate the highest interest rate debt first.
Be Cautious Consolidating Debts
Be cautious in dealing with commercial debt consolidation services. Make sure you deal with an honest and reliable firm. Typically, these companies combine your debts into a single loan at a lower interest rate but also offer counseling services and advice on how to handle finances to pay off debts. A disadvantage of these is that the interest is not tax deductible like a home equity loan. Also be careful if they offer debt forgiveness; you may be assessed taxes on a forgiven debt that's considered income.
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