Debt Consolidation

Debt Consolidation

Debt consolidation is a strategy sometimes used by consumers to better manage their debt problems. Rather than paying off several separate bills each month, a consumer consolidates his or her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time.

What Type of Loan Should You Get?

Debt consolidation loans allow you to borrow to refinance or restructure debt. But if you're looking to consolidate different types of loans, or if you're looking for cheaper rates than those offered by credit-card companies, check to see if you qualify for a personal loan from your bank or credit union. These loans can be secured (backed by something you own) or unsecured, but unsecured loans could be more difficult to qualify.

If you're a homeowner, then consider a home equity loan. The interest on these loans is tax deductible, as long as your loan doesn't exceed the value of your house. Bank Rate Monitor provides national averages as well as the best rates by state. Just bear in mind, if you default on your loan, you risk losing what is most likely your most valuable asset.

And finally, you could also consider borrowing against your 401(k) or other investments via a margin account. Borrowing on margin to pay off your debt can be cheap (most brokerages charge you slightly more than the broker call rate, which these days is 2.75%), but very risky, and we wouldn't recommend it. Why? Because if the market moves in a way you hadn't anticipated, then that loan could be called in — pronto.