If you’ve gotten into some debt recently, or even if you have been struggling with debt for a long time, you may be starting to think about strategies that would finally allow you to be debt free. After all, if you didn’t have those monthly payments to your creditors, think about how much more disposable income you would have to enjoy your life.
One excellent strategy for getting out of debt more quickly is called debt consolidation, and in this article, we will discuss what that means and how you can do that.
What is debt consolidation?
The name says it all. Debt consolidation is when you consolidate all your various debts into one debt. You trade multiple creditors for one creditor so that instead of making several debt payments each month, you just make one larger payment.
Debt consolidation does not immediately lower the amount of debt that you have – it simply transfers it to another creditor. What it does do however, is it lowers the amount of interest that you are paying on debt maintenance so that more of your payments are going to pay off the principal – which helps you to get out of debt faster. There is also the advantage of convenience, since there is now only one payment to remember instead of multiple payments.
Methods of debt consolidation
Now that you know what debt consolidation is, let’s discuss ways that you can consolidate your debt. If you are a homeowner and you have sufficient equity in your home, the most inexpensive (lowest interest) ways to consolidate debt is to borrow from your home equity.
If you do not own a home, or you don’t have enough equity in your home, you may still be able to get an unsecured debt consolidation loan, but the interest rate will be a little higher.
Here are the three most common loans people use for debt consolidation:
- Second mortgage – this is a lump sum loan against the equity of your home. In most cases, lenders will let you borrow as much as 80% of your home equity.
- Mortgage refinance – with this type of loan, you break your current mortgage and replace it with a new one that includes both what you owe on your current mortgage plus enough to pay off your other debts. Your new mortgage will be higher however you may be able to save money overall if there is enough of a difference in the interest rate that you are paying.
- Unsecured debt consolidation loan – this type of loan is more like a bank loan since it is not secured by your home equity. This type of loan will have the highest interest rate of the three options, but it may still be low enough to save you a considerable amount of money on your debt repayments.
Contact Akal Mortgages today
If you are interested in a debt consolidation loan or mortgage, it is best to speak to an experienced mortgage broker who can help you determine the right type of debt consolidation loan for you. Contact Akal Mortgages today to speak to one of our brokers.
