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Also known as a consolidation loan, debt consolidation is the substitute of several loans with a single loan, often with a lower monthly payment and a longer repayment period.
Regarding debt consolidation, the Federal Trade Commission states, that a consumer may be able to lower the cost of credit by consolidating debt through a second mortgage or a home equity line of credit, but these loans require the home as collateral. If you cannot make the payments, or if your payments are late, you could lose your home.
The credit counseling program allows you to:
- Significantly reduce your interest rates
- Help with collection / creditor calls
- Get out of debt much faster
- Remove excessive fees
- Rescue your credit score
What’s more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay “points,” with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.
Source: Federal Trade Commission, “Facts for Consumers”
Therefore, by consolidating your unsecured debt with a home equity loan, you run the risk of losing your hard-earned assets if you default on your payments. You will still pay the full balances on your unsecured debt and must have a low debt-to-income ratio to qualify.