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Ranking Your Options for Debt Consolidation

Having multiple debts, including car loans, student loans, credit cards, and personal loans can create significant challenges to your finances, complicating your budgets and making it difficult to stay organized. In most cases, it would be easier to have one payment.

Debt consolidation is a practice of taking all your debts and compiling them into one payment. While this won’t eliminate your debt, it can, depending on the details, result in better overall terms, lower interest rates, shorter payment schedules, or lower monthly payments.

So what are the best options for debt consolidation?

Let’s find out…

First to Worst: Ranking Your Options for Debt Consolidation

1. Term Loans

Term loans, also called personal loans, are simply loans for a specific amount that comes with a timeline for repayment. Businesses often use them for a cash injection, but homeowners and consumers can use them to pay off all their debts and have one payment instead of many.

These convenient loans have an end date that is usually closer than other mortgages, so paying them off usually comes quickly. You can choose a fixed-rate loan, which means your payments will not only end quickly, they will be predictable. This is why they are recommended by many financial experts.

You have to be careful, however, as term loans usually come with interest rates that are slightly higher than mortgages. Because they often have shorter terms, your monthly payment will likely increase; the advantage being that you pay it off faster.

Term loans are highly structured, which usually helps people stay on track as they go. Although the interest can be higher, it is often far less than the extreme rates paid on credit cards, do using term loans to pay off credit cards is often a great choice.

2. Unsecured Debt

When you take out a home mortgage or a car loan, the debt is “secured.” This means that the lender has a physical object (the home or vehicle) that they can take if the debt goes unpaid. “Unsecured” debt, on the other hand, is not attached to any object.

When structured properly, unsecured credit can actually have a manageable interest rate, usually around 5 to 8%, and you can keep the payments small, down to only the interest charge. This makes them ideal for consolidating debt without chaining yourself to a large payment, and the flexibility allows you to adjust as needed. They do, however, require discipline if you want to pay it down quickly.

Debt consolidation won’t eliminate your debt, but it will help you stay organized.


Home Equity Lines of Credit, also called “HELOCs” (pronounced Hee-lock), are debts that are secured by your home. (If you don’t pay, the lender can seize your house.)

Basically, the bank will give you a line of credit, from which you can withdraw as needed, and your home acts as collateral against the debt.

Because they are secured, which reduces risk to lenders, they usually come with lower interest rates, usually around 4.5%, which is better than many other forms of consolidation. One of the advantages is that your ability to borrow is directly tied to your home equity, so the more of your home you own, the more available credit you have.

They do, however, have variable interest rates, which can make them slightly unpredictable. One of the main reasons that they fall to #3 is they are secured to your home; in the event that you can’t make the payment, a bank could legally seize the roof over your family’s head. This makes them a risky choice.

4. Refinancing

If you have a high-interest mortgage, you may be able to benefit from refinancing your loan into a new mortgage. In some cases, refinancing into a fixed-rate loan with a low monthly payment can act as an escape from an overbearing, untenable mortgage.

The math, however, may not always work in your favor. In some cases you can do what’s known as “cash-out refinancing.” This basically means that you get a large loan and turn some of the equity you have gained into hard cash. This injection of money could help you pay off credit card, student, or auto loans, essentially consolidating your debt into one mortgage payment.

Refinancing, however, comes with fees and possible penalties if not managed properly. Be especially careful of pre-payment penalties, which can severely limit your options in the future.

5. Second Mortgages

This is similar to refinancing, but instead of one loan you take out a second loan against your home and use the funds to pay off your debts. You will pay higher interest rates because the lender will be second in line for repayment in the event of a foreclosure.

These loans can be useful as a last resort to turn multiple debt charges into a single, manageable payment; a payment that will likely have lower interest rates compared to credit cards

But you are committing to additional costs, and interest rates may go up, even if you choose a fixed rate, as the loans often go through mandatory renewal. These loans are also difficult in themselves to refinance, which makes them a last resort. But they’re not the worst option…

6. Co-Signers

It always sounds like it will work out perfectly.

“I can’t get debt consolidation on my own,” people think, “so I’ll ask my (mother/father/brother/sister/aunt) to cosign on a consolidating loan. I’ll be in good financial standings in the future, so what could possibly go wrong?”

Turns out, there are lots of things that could go wrong.

If you have a friend or family member cosign your loan and you can’t make the payments, the lender can go after the cosigner’s property and ruin their credit. You are putting your family members at risk when they agree to cosign, which is why it’s almost always best to leave your friends and family out of your debt consolidation efforts.

Work with a Team that Knows Mortgages!

If you want more information about mortgages or various debt-consolidation options related to your home, contact San Diego Purchase Loans.

We are proud to provide expert guidance when it comes to real estate and mortgages, and we would love to use our common-sense approach to lending to help you get the loan you deserve!


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Chad Baker, CrossCountry Mortgage   
NMLS# 329451 | CCM NMLS# 3029