It's possible for a borrower to acheive debt reduction through refinancing different loans, consolidating different loans into one single loan, reducing credit card debt, repositioning current assets to pay off the debts, using a home equity loan or home equity line of credit, or Prepaying a mortgage or any other loan. Here is some detailed information on the following choices.
- Refinancing: Refinancing can help in saving money to a large extent, as the interest rates have decreased greatly. The loan term can also be increased which will help in reducing the monthly payment. However, the extension of the term of a loan will increase the amount of interest. If a person is unable to pay the amount as promised, the lender forecloses the property and sells it off to recover the debt.
- Consolidation: Consolidation makes the bill paying task simple, as different loans are combined together to have one monthly payment only. The interest is also considered to be lower than the interest on the individual loans.
However, if a person is using a home equity loan to consolidate the debts, his home will be kept collateral for the loan. If a person fails to make the payment, the lender can foreclose on his home and sell it off to recover the money. The interest on the consolidated loan is not tax deductible.
If the term of the consolidated loan is longer than the original loan, the borrower will be paying more interest even if the rate of interest is lower.
- Reducing the credit card debt: The cost of the credit card can be kept lower, including minimizing the interest rate and the annual fees. It is always advised to make the full payments of the credit card debt whenever possible.
- Using a home equity loan or home equity line of credit: The interest a person pays on an equity loan is lower than the rate of the credit cards and other unsecured consumer debt. This type of financing is tax deductible. So non-deductible interest is converted to deductible tax interest Home equity loans can be easily bad behavior ed by having large debts.
Since they have low minimum payments, only the interest and a nominal amount of principal interest are required. In case a person fails to make the payment, his house will be foreclosed by the lender.
- Repositioning the current assets to pay off the debts: The funds can be withdrawn from the investment vehicles for the purpose of paying down the debt. Some of the current assets such as the stocks, bonds or jewelry can be used to pay back the amount of debt.
- Prepaying a mortgage or any other loan: As the real estate loans are amortized, a lot is paid at the beginning of the loan's term, while the remaining is paid towards the end. In this way, a great deal of money is saved by the time the loan is paid back.
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