How to Merge Debts

Paying your debts with a home equity loan helps get a lower interest rate.
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Merging your debts can be a big step towards paying off all your loans. If your debts are spread over multiple accounts, it's easy to lose track of a payment — resulting in penalties and higher interest rates. Consolidating your debts reduces the headache of bill management and can create lower interest payments. The best debt merging strategy will depend on your assets and your credit score.

Home Equity Loan

If you own your home, you can take out a home equity loan from your bank against the value of your property. With this money, you can pay off your outstanding debts and merge all your debt payments. Home equity loans charge lower interest rates than other debts because they are secured by your house. You may also be able to deduct your loan interest from your taxes. While a home equity loan may sound like a dream solution, you need to be careful. If you can't pay your home equity payments, the bank can seize your house.

Changing Credit Cards

If your credit score has improved over the past few years, you may be eligible for an upgrade on your credit card. If you are considered a better credit risk, your new card will reduce the interest rate on your card balances. In addition, many cards offer an interest-free period as a bonus for new cardholders. Transferring your existing card balances to a new, better card lets your merge your debts while reducing your monthly credit card interest expense.

Debt Counseling Service

If you are having trouble managing your finances and need a helping hand, a debt counseling service can make repaying your debts easier. When you sign up with these companies, a debt counselor reviews your financial situation and puts together a strategy for paying off your debts. With this plan, you make one monthly payment to your debt counseling service and the funds are distributed to your creditors according to the plan. The debt counseling service should also negotiate a lower interest rate for your debts so it will be easier to make your payments.

Retirement Plan Loan

Your retirement accounts offer one more option for merging your debts. Plans like 401(k)s often offer plan loans against your account balance. You can use this loan to pay off your debts and create one merged debt from your retirement plan. The advantage of borrowing against your retirement plan is that you are borrowing from yourself. Interest payments go back into your account instead of towards a bank's profits. The downside of retirement plan loans is that you must pay back your loan in five years or the IRS will charge you tax penalties. In addition, if you quit your job, you need to pay off your full loan immediately.

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