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Basics Beginner: Managing Your Debt

Introduction to Managing Your Debt How Much Debt Can You Handle? Understanding the Minimum Monthly Payments on Your Debt Manage Your Debt by Creating a Spending Plan, and Stick to It Create a Plan to Get Out of Debt Trading Unmanageable Debt for Manageable Debt Refinancing and Consolidating Your Debts Finding Help in Managing Debt When You Need More Help with Your Debt: Counseling and Bankruptcy Summary of Managing Your Debt
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Refinancing and Consolidating Your Debts

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Refinancing and Consolidating Your Debts

Using home equity to reduce your payments

Some folks with high consumer debt—loans for things like cars, clothes, vacations, etc.—may also have equity in their homes. It might make sense for such persons to use the equity in their homes to consolidate their high-interest, unsecured consumer loans for low-interest, secured home equity loans. The result could be lower monthly payments. Interest on consumer loans is not deductible from income for federal income tax purposes. So consolidating your consumer loans by refinancing your home, or taking a home equity loan, could save you money and improve your cash flow.

Things To Know

  • Taking out a home equity loan could result in lower monthly payments for some people.
  • Consolidating or refinancing debts can result in lowered payments.

Refinancing/consolidating tips

When refinancing or consolidating (combining) loans, consider the following:

  • Do not combine lower-interest-rate loans into a higher-interest-rate consolidation loan.
  • Be careful about consolidating short-term loans into longer-term loans, because this increases the costs in the long term. If you are consolidating short-term loans into a longer-term loan to improve current cash flow, accelerate payments as soon as you can on the longer loan to mitigate the additional cost.
  • Consolidating loans often trades unsecured loans for secured loans, which can put the collateral (your home?) at risk.
  • Refinancing and consolidating loans usually have additional costs, which may not make them worth the costs. Buyer beware.
  • Refinancing and loan consolidation may be ways to reduce your monthly debt payments, leaving you adequate cash flow to meet your necessary expenses. They may also provide you enough slack to resume savings.

Another approach

There are those who take a different approach to their debts. Instead of consolidating them, they pay off certain ones first, and then apply the payments that would have gone to those debts to the other ones. This can provide a feeling of accomplishment that motivates them to continue paying down debts.