Secured Loans as a Means of Consolidating Credit Card Debt - It Does Make Sense
You may recoil at the thought of taking out a second mortgage on your home. The simple fact of the matter is though that if you are upside down in credit card debt and are not making any progress in paying these debts off, then securing a loan on your home's equity can and does make sense.
Let's say that the home that you bought for $388k in 1998 is now worth $600k. The currently outstanding mortgage on the home is $250k, so you have built up quite a bit of equity in your home.
On the flip side though, you are currently neck-deep in credit card debt to the tune of $65,000. You financed a now failed business on your credit cards, and are barely paying enough every month to take care of the interest on the cards, let alone make any dent on the principal.
Let's say that you are paying an unfathomable interest rate of 19.8% on your credit cards, averaged out. Well, if you took out a $70k secured loan on your home, you could pay off all of your credit card debt, and instead have a much more management monthly payment for your secured loan, at a much lower interest rate (8-9% in most cases, don't pay anymore, all loan companies are not the same.)
In this case, you would still have a fantastic amount of equity in your home, but you would not be getting robbed paying almost 20% interest on your credit cards. You could now shed up all but one of your cards, and instead focus on just paying the secured loan payment amount.
This is a much better option financially, and you will be able to sleep a lot better at night. Secured loans can be used to consolidate all manners of debt, and not just credit card debt. Though, credit card debt is often the nastiest.
Filed under: General Knowledge