Types of Debt Consolidation

By:
Catherine Brock | Wed, 11/21/2007
It's time to make one point very clear: Consolidation will backfire if you don't swear off all future debt purchases. Just as the outlaws of The Wild Bunch went looking for one final hold-up, you're about to make your last credit decision. A few considerations will readily reveal which consolidation program is right for you.

For homeowners: Home equity loan


If you have measurable equity in your home, you can trade in several credit card balances for a fixed-rate home equity loan. This is generally the easiest and least expensive consolidation option. Other advantages include:

  • The interest may be tax deductible.
  • The interest rate will be lower vs. an unsecured debt consolidation loan.


Nothing comes without a price, however. The home equity consolidation strategy has some disadvantages as well:

  • Home equity debt is secured by your home; if you don't make payments, the lender will seize the property.
  • Your credit cards will be paid off, which will present a tempting situation to purchase anew if you have a spending habit.
  • You may incur closing costs when the loan closes.

For college grads: Student loan consolidation


Consolidation of education-related debt can be done directly through the federal government or through an approved Federal Family Education Loan lender. The perks are:

  • Regulations set a maximum interest rate.
  • Student loan consolidations have no upfront fees.


On the downside, student debt consolidation loans aren't as flexible as other types. If you can work around the following restrictions, you'll be in good shape:

  • Only certain types of education-related debt can be included.
  • Loans can't be consolidated until they're in repayment status.

For big spenders: Professional credit assistance


Remember the good, the bad, and the ugly from Chapter 1? If your debt came from purchases of non-essential, short-lived items, you might be a candidate for professional credit counseling. These are the advantages:

  • A trained credit counselor will help you address your spending habits and create a budget.
  • The agency will negotiate with your creditors to reduce the amounts you owe.


And the disadvantages:

  • Creditor negotiations may negatively affect your credit score.
  • The agency will charge a fee for its services.


Contact the National Foundation for Credit Counseling (NFCC) or visit www.nfcc.org to learn more about professional credit counseling.

For non-homeowners: Unsecured debt consolidation loans


Finally, the unsecured personal consolidation loan has one very compelling advantage: No collateral is required. If you don't own any real estate, this may be your only option. Unfortunately, you'll have to accept the drawbacks too, in the form of higher fees and higher interest costs.

Hopefully, by now you're feeling comfortable that there are real solutions that can help you manage your debt. The last thing left to learn is how to avoid being scammed.

Start here to compare debt consolidation rates from top lenders in our network

Find Mortgage Rates

National Rates

Loan Type Today
30 yr fixed 5.02
15 yr fixed 4.55
5/1 ARM 3.99

Compare Rates »

Rates may contain points

Browse Mortgage Rates

Debt Calculators