Credit Loan > Debt Consolidation > Debt Consolidation and Tough Economic Times

A Depressed Economy Results in Lower Interest Rates

Now may be your best time to lock in lower interest rates and consolidate debt. As the economy has slowed down, interest rates have decreased as well. If you are still paying high interest rates on credit cards or other unsecured debt, and you have some equity in your home, you may be able to restructure your debt, reduce your monthly payments, and get everything paid off faster.

If you are currently paying interest that is more than one percent higher than the current mortgage rates, and you have more than $10,000 in unsecured debt, you may be a good candidate for debt consolidation through a Home Equity Line of Credit (HELOC) or other home equity loan that could be used for debt consolidation. If you are paying 15% or higher on credit cards you can pay those off and be paying a much lower interest rate. By paying less interest, you may also be able to reduce the principal on your debts faster by applying money that would otherwise have gone to pay higher interest.

If you do not have enough home equity to pay off all your unsecured debt, then you will have to prioritize. The best approach is to use debt stacking. You do this by actually paying off the lower balances first; this frees up money quicker to apply to higher balances. Say you have one high balance credit card that will not be covered by a consolidation loan. By eliminating all the payments of the lesser balance accounts, this should free up enough cash-flow to attack the remaining account. Then you will quickly be left with only the debt secured by your home’s value.

Make no mistake about it. Debt consolidation is risky business if you just use it to acquire more debt. Remember, you are reducing your equity in the home, so you want to be focused on using the money you get to eliminate debt as fast as you can. There is also another advantage to paying off unsecured debt with your home equity; it makes the interest from the loan tax deductible. By reducing the amount of tax you owe, you should be able to reduce your withholding-- freeing up additional cash flow for reducing debt.

By leveraging the equity in your home to consolidate debt, you will be able to eliminate debt faster. Tax savings will also help with available cash flow. And, you can avoid paying high interest rates.