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Consolidate Loans

Many Americans are electing to consolidate loans in order to lower monthly payments and reduce interest rates. While loan consolidation can be a good choice for reducing overall debt, there are pros and cons to this strategy which should be given careful consideration.

In order to consolidate loans, borrowers must be creditworthy enough to obtain a debt consolidation loan. With today's recessed economy this is no easy feat. Many lenders are no longer extending credit to borrowers with less-than-perfect credit.

Borrowers who have not reviewed their FICO scores and credit history should obtain a current credit report from each of the major credit reporting bureaus before applying for consolidation loans. Under the Fair and Accurate Credit Transactions Act (FACT), consumers are entitled to a free report annually, which can be obtained from

Consumers can consolidate all types of loans including automobile, mortgage, and student loans. Post graduates with federal subsidized and unsubsidized education loans might not be able to mix college loan consolidation with home and auto loans. It is best to consult with a college loan financial consultant to determine the best approach for consolidating multiple student loans.

Most debt consolidation loans are home equity loans or home equity line of credit (HELOC) accounts. In order to consolidate loans into a home equity loan, borrowers must possess sufficient equity in their home. Using the home equity, a second loan is secured using the real estate as collateral.

HELOC loans are an open line of credit which can be accessed as needed. In most cases, adjustable interest rates are charged on HELOC loans. However, interest is charged only against open balances.

It is important to realize that home equity loans can place your home at risk for foreclosure. Since the property is being used as collateral, if you default on the debt consolidation loan the lender can commence with foreclosure proceedings - even if you are current on your first mortgage note.

Prior to applying for a debt consolidation home equity loan, be certain to understand the risks involved. Using your house to consolidate loans can be a risky and expensive strategy. However, when used properly home equity loans can pay off outstanding debts. The consolidated home equity loan payment should be less than the combined value of the paid-off loans.

Consolidation loans are usually repaid over a period of 10 to 15 years; while unsecured loans, such as credit cards and department stores, are repaid over a period of 3 to 5 years. For this reason, it is imperative to evaluate the true cost to consolidate loans. While you will be paying a lower monthly payment, over the long run you will be paying considerably more in interest.

Cash-out refinancing is a lesser known way to consolidate debt. This type of financing requires the creation of a new mortgage loan and involves paying off the original note and adding additional funds to pay off outstanding debts. Cash-out refinancing is usually only available to homeowners with considerable home equity.

It is important to become educated about the various ways to consolidate loans. Begin by reviewing finances and determine where spending can be trimmed. Next, develop a get out of debt plan and put it in action. Doing so will allow you to break the financial chains that bind you and become debt-free.

Our personal finance library offers a variety of debt reduction articles and provides additional resources to consolidate loans, pay off credit cards, and reduce debt. New articles are published weekly, so take a moment to subscribe to our mailing list and receive instant notification when new money management articles are published.