What to do When you Have too Much Debt: Debt Consolidation

You’ve got a beautiful home with a fully loaded kitchen, a family room with a 50-inch plasma TV and a brand-spanking-new SUV in the driveway. Whenever you entertain, your guests congratulate you on your success. Too bad you can’t tell them the secret of how you did it: like Stanley Johnson, you’re in debt up to your eyeballs!

Few of us are wealthy enough to go through life without borrowing money. But there’s a difference between good debt and bad debt:

Good debt

Good debt is borrowing at a low interest rate to obtain something that is likely to grow in value. Buying a home, going to school to improve your career options or borrowing to invest are all examples of good debt.

Bad debt

Bad debt is usually carried at high interest rates and is used to purchase things you can’t really afford. Using credit cards to buy electronics or to pay for expensive vacations and then taking months or years to pay them off are examples of bad debt. Buying a car with a 7-year loan and keeping the car for only four years is also an example of bad debt.

Your first step in taking control of your finances is to put a halt to the bad debt you’re accumulating:

  1. Cut up all your credit cards except the one with the lowest rate, and use that one for emergencies only.
  2. Make a list of all your bad debts and make a plan to pay them off in order, starting with the debt that has the highest interest rate.

Once you’ve tamed your spending, consider these strategies to help you pay down your debts faster and with lower charges:

Consolidate your debt

If you have several high credit card balances, consider taking out a single loan and paying off all your accounts at once. A debt consolidation loan will almost certainly carry a lower rate than your credit cards, and that can mean big savings. For example, if you owe a total of $30,000 on three cards with an average rate of 15 percent, paying them off by taking out a loan at 10 percent will save you $1,500 in the first year (minus the closing costs on the loan). In addition, rather than several payments each month, you’ll have just one.

Tap into your home equity

If you have built up substantial home equity, it may be wise to use some of it to pay down your debt. Home equity loans carry low interest rates because they are secured with your property, which makes them an excellent choice for a debt consolidation loan.

Another option, especially if you’re thinking about a new mortgage, is cash-out refinancing. This allows you to turn your home equity into cash to pay off what you owe, and then add that amount to your primary mortgage. Your new principal will be higher, but your rate will almost certainly be much lower than what you are currently paying on your consumer debts and, again, you’ll have the convenience of a single monthly payment.

Refinance your car loan

After your mortgage, your car loan is probably your biggest debt. And yet, especially if you opted for dealer financing, there’s a possibility you may be paying more than necessary. Consider shopping around to refinance your car loan to replace your current one.

To determine whether you can benefit from a new auto loan, use the LendingTree auto loan payment calculator.

Consolidating and refinancing can be useful tools to help you get out of debt. But remember, the only way to make sure you don’t once again find yourself in over your head -- or up to your eyeballs -- is to spend less money than you make.

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