Should You Use a Home Equity Loan for Debt Consolidation?

The purpose of a consolidation loan is to combine many higher interest debts into one monthly payment at a lower interest rate. Most consolidation loans offer lower monthly payments spread out over a longer period of time.

Consolidation loans can make financial sense, if the person consolidating does not borrow more than what is actually needed to pay the outstanding bills and IF the problem that caused the debt in the first place has been dealt with.

Home equity loans

The most common method of consolidating loans is through the use of home equity loans.

At first glance, it does appear to make sense to consolidate higher interest debts into one lower interest rate loan by using your home equity as collateral.

However, using your home equity as collateral can be dangerous if it encourages you to put your home in jeopardy or to borrow even more to buy things that you could do without.

In addition, one of the primary disadvantages of using a home as collateral for an equity or consolidation loan is that most home equity consolidation loans are demand loans. This means that the bank or lending institution has the right to call the loan due at any time. If you are not able to pay the total amount at the time of the demand, foreclosure proceedings can be implemented without further notice.

Alternatives to Home Equity Loans

If you feel that they you resolved any overspending problems and have the discipline to avoid credit in the future, there are alternatives to home equity loans for consolidation:

• The cash value of an insurance policy

• Bank loans using in-bank deposits as pledged collateral

• Credit union loans using in-bank deposits in the credit union

• Family loans or gifts

• Retirement account withdrawals or loans.

Caution should be used when borrowing against the cash value of an insurance policy or a retirement account, which may result in other financial or tax consequences. All financial implications and costs should be weighed carefully before a decision is made. However, sometimes those are the only options, and if the interest being paid on credit cards is exceptionally high, these drastic measures may be warranted.

The key to success with a consolidation loan is discipline. Once you have consolidated your debts, you must maintain the discipline it takes to stop spending with credit, and pay off the consolidated loan as quickly as possible.