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Debt Consolidation

Definition: Debt Consolidation

Debt consolidation can take the form of home equity loans or lines of credit, balance transfers to a zero-percent interest credit card, and debt-consolidation loans. Debt management and credit counseling are other options to consider before shifting your debts.

Borrowing against your home means you could lose your home if you defaulted on the loan, but some consider this a favorable choice because equity loan interest generally is tax deductible. Zero-percent cards allow a borrower to pay debt at zero interest for an introductory period, but if the debt isn't paid within that short time, the borrower is again stuck paying regular rates and hasn't made much leeway.

When a financial institution consolidates a consumer's debts, it combines her multiple debts into one and lowers her monthly payment. Because this involves taking out a loan to pay off existing debts, there are risks involved and it doesn't solve underlying issues of why debt has been incurred in the first place. This should only be a viable option if the costs of the bundled loan will be less than the current payments to various creditors.

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gigill gigill 8 years
My friend is going for the loan option and he seems to think it's the best option to get his finances under control.
graduatedsqueaks graduatedsqueaks 8 years
hmm, the tricky part is that for a lot of debt consolidations, they extend the amount of time that you'll have to pay off the loan, which usually means you'll pay more in the long run. Of course, if you are looking to lower your monthly payments (and the interest rate isn't too bad), then that is a good option. It's also helpful if you've got a bunch of different debts from the same place (perhaps many student loans that you took out during your schooling) so that you don't have as many individual payments (that you could accidentally forget about!)
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