Consolidating debt is combining the debts you owe from more than one loan and using a single loan to pay off some or all of it. This should be done only when the finance charge on the consolidating loan will be lower than the annual finance charge that you are paying on the loans that you would consolidate and there are no other fees that make the overall charges higher. For example, you would take three loans at 10%, 12%, and 15% finance charges and consolidating the amounts owed into one loan at a 6% finance charge.
This strategy allows you to more quickly eliminate debt by reducing the interest you pay to the lowest possible level and helps simplify your budget by replace many different payments with one payment. For this to work at its best to get you out of debt and into financial freedom you must resolve that you will not take out other consumer loans.
Before using this approach it is best to close all retail store charge accounts and cut up the cards, so you won't be tempted to use them again. Most of these accounts charge you interest at nearly twenty-five cents on the dollar. If possible, consolidate your higher interest debt into a fixed-rate low interest credit card or consolidation loan. The latter are normally closed-ended, which means the amount paid off each month is not re-usable. This is good for people prone to undisciplined spending to stop them from utilizing more debt.
Almost never consolidate a debt for which you are currently being charged interest at a lower rate than the credit card or consolidation loan’s interest rate. Read the credit card agreement to make sure it will not at some point raise your interest rate to a level that is higher than what you currently pay.
If you have home equity, you could consider consolidating your debts using a second mortgage or home equity loan. Normally, you could obtain a lower interest rate than that provided by other types of loans and you might be able to reduce the amount of income taxes you owe each year by itemizing the home equity loan interest on your federal tax return. However, you should be aware that failure to pay on this type of loan could result in the foreclosure of your home. So, faithful discipline and diligence sticking to a budget and employing you income to get out of debt as soon as possible is necessary to avoid problems down the road.
If you can pay off your debts in a short time (1 to 2 years) without taking other loans, then it is usually best to avoid doing so and simply use great budgeting focus to pay your debts off.
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Deuteronomy 28:12, 15, 44, Proverbs 22:7, Luke 16:8-9, Romans 13:8
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