Smart Debt Consolidation

There are many benefits to debt consolidation, particularly for individuals who are struggling to pay off high interest debt. Debt consolidation involves taking out a single loan to pay off a number of different debts. These types of loans often result in a significant savings in interest expense. Debt consolidation can reduce your monthly cash outflow, and also reduce the length of time it takes to get out from under your debt. For many people, debt consolidation is the key to getting their finances under control.

If you have credit card bills or other high interest loans and are able to refinance your home or take out a home equity line of credit, it is possible that you can enjoy a significant financial advantage by refinancing. Before you decide to pursue debt consolidation, it is a good idea to educate yourself about what does and does not work to your advantage in such a situation.

For example, it's important to keep in mind that the purpose of debt consolidation is to take high interest debt and roll it into a lower interest repayment option. If you have low interest loans, such as Federal Student loans, it isn't generally in your best interest to include them in a debt consolidation. Your student loans probably have a lower interest rate than you will be able to get on a home loan refinance or equity line, so you should leave them alone.

You may also have some debts, such as medical or hospital bills, that do not carry interest. It certainly makes sense to keep paying these obligations on their own. Rolling an interest free debt into an interest bearing debt would cause you to end up repaying more in the long run, which is counter-intuitive to the very purpose of refinancing.

You also need to look closely at your higher interest debts to verify that consolidating them into a new loan is in your best interest. If you have a high interest loan that will be repaid in less than a year, you may be better off leaving it out of the consolidation. The only way to know for sure is to calculate the amount it will cost if you pay the debt off by itself and compare it to the amount it will cost if included in a consolidation package.

By making sure that you are including the right kinds of debts when you consolidate, you can get your financial obligations under control. If you are smart about how you approach debt consolidation, you can really benefit from combining your high interest debts into a single monthly payment. Refinancing your home with a fixed rate mortgage can be an excellent tool for getting out of control debt back in control. You can enjoy the peace of mind that comes with knowing that each payment you make gets you closer to being debt-free.

As always though beware of who you organize your debt consolidation through. Every industry has sharks, so always do due diligence research on the company you use.