The severity of American personal debt was laid out in the sunlight last year when the independent PEW Charitable Trusts published its report, The Complex Story of American Debt: Liabilities in family balance sheets. Pew found that 80 percent of us have debt – with approximately $10 trillion nationwide tied up in mortgages. In fact, Pew says, mid-life Gen-Xers now carry twice as much mortgage debt as their Baby Boomer parents had at 30. And while they prefer not to have it, 70 percent of Americans told researchers that debt is the necessary evil in the pursuit of their lives.
Student loan debt, now estimated at $1.2 trillion, increases at a rate of $2,726.03 per second, according to MarketWatch. Forty million students have graduated with significant debt to blunt their buying power, which only contributes to the stalled economic rebound. A drop in mortgage debt over the last few years can be attributed to fewer people buying homes and more people borrowing against their equity to restructure or consolidate debt.
In a Nutshell: Debt Consolidation vs Debt Restructuring
Each method of wiping out and/or re-routing debt – consolidation or restructuring – comes with it attendant risks and advantages. The debt restructuring process is ordinarily the recourse for imminent bankruptcies and is ordinarily a first choice for struggling business and institutional borrowers. For homeowners, restructuring can be created through Chapter 13 bankruptcy with a five-year payout with approval from the lender. In the distaff side, it can destroy your credit for 10 years or longer. Debt consolidation, done under guidance of legitimate lenders, can be a credit lifesaver.
Debt Consolidation Pros and Cons
LendingTree's Debt Consolidation Calculator is designed to give borrowers a snapshot of the potential monthly payments and other benefits of consolidating outstanding debt into a single loan at a lower interest rate. Refinancing is often the path of choice for distressed homeowners. So are personal loans. Here are two other common choices to avoid a torrent of collectors:
For consumers with good credit, some lenders offer a zero-interest balance transfer card at an introductory rate, adjusting in nine months to at least 13.24 percent. But remember, those rates after the introductory period are variable. There are low upfront fees for the card but transfer fees, while negotiable, are around 3 percent. Do some people hop from zero-free introductory rate card to another one before the interest rate goes up? You bet they do. But be ready to pay all transfer fees and, by the way, a late payment can jack you into the high-interest rates while harming your credit.
Home Equity Loan
Borrowers can use home equity loan or home equity line of credit (HELOC) products to bundle outstanding debt into manageable payments, with leeway in locking in either beneficial terms or interest rates. HELOCs this week are as low as 2.96 percent. In some cases, interest paid on the consolidation loan is tax deductible. Of course, the house is on the line if the borrower falls behind again. And whatever debt the borrower rolled into the consolidation loan (along with the house) cannot be discharged by a bankruptcy.