Consolidating your credit lines

A consolidation loan is when a financial institution gathers all of your open credit accounts and lumps them into one group. The borrower then has only one loan to pay on and likely has a lower interest to deal with as well.

This is a good option for those hoping to reduce their debt however consolidating is not without its risks. Be sure to see if this type of loan is right for you. You need to do your research with your debt consolidation because it is very easy for your debt consolidation strategy, or advisor, to cost you more money than you had planned.

Being aware of the options and laws with debt consolidation will keep you safe and help you regain control on your finances.

Keep in mind that your overall plan is to improve your credit score, so a well thought credit repair strategy is the undertone here. 

For many people a consolidation loan is the fastest way to get out of debt. All of those revolving credit loans that have been getting out of control can now be grouped together in one payment.

The lower interest rate means that your payments on this one loan will be less than the combined payments on the group of loans you were paying on. This extra cash can be used to pay more on the principle of the loan and to in turn pay off that debt a lot quicker. It can also be used to simply have a little more room in your monthly budget. 

When consolidating your debt you will need to look at each individual credit account and know what interest rates you are paying. It is only worth consolidating those loans with interest rates higher than what the financial institution is offering in the new consolidation loan.

You will also need to decide what loans will be part of the consolidation. If you have loans that are nearly paid off then adding them to a consolidation term that may be over five to ten years is not a good option. 

If you are using a home equity loan to consolidate you are offered an interest rate of a mortgage. Your new interest rate could be somewhere around six percent instead of the 12 to 18 percent, you may be paying on your credit cards.

This is a significant drop that you will notice in your monthly payments. The home equity loan is based on how much your house is worth verses how much you owe. That will determine your equity. If you have little equity in your home you will likely not be eligible for this type of loan.  

A consolidation loan has its risks. You are paying off several credit accounts in order to manage that debt. That means that you should avoid re-opening new credit accounts. You will find yourself in the same or worse debt situation.

Another risk is with the home equity. Because your home is on the line for this consolidation delinquent payments that eventually go to collections could result in the loss of your home. A consolidation only works as part of a long term plan to reduce debt.