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For many people, debt consolidation is a major step on the path to financial health and freedom. By taking out a new loan and using the proceeds to pay off your existing debt, you can potentially save money on interest, lower your monthly payment, and/or pay off your debts sooner. Debt consolidation can also reduce your financial stress by eliminating payments to multiple creditors and helping you establish a clear date by which your new debt will be paid off.
You can access the funds for debt consolidation multiple ways. Common options include taking out a personal loan, transferring existing balances to a new credit card account, and borrowing from a retirement plan, such as a 401(k). You can also access funds by turning a portion of your home’s equity into cash, which can be a smart option for some. Below we’ll walk through the potential benefits of using home equity for debt consolidation.
Competitive interest rates can help you maximize the benefits of debt consolidation. Because home equity solutions are secured by your home, interest rates are often meaningfully lower than those of unsecured personal loans — and capturing a significantly lower interest rate compared to your existing debt is one of the key factors in deciding whether debt consolidation makes sense for you. Interest rates for personal loans typically start around 10% Opens a new window.for excellent credit, while the average rate for home equity loans starts just below 6% Opens a new window.. While using your home as collateral often gets you a lower interest rate, if you fall behind on your payments you risk losing your house.
Terms for home equity solutions can often be as long as 20 years, which gives you ample time to repay the balance and often translates to lower monthly payments. Personal loans terms, for comparison, rarely go beyond 10 years. Similarly, if you borrow from your 401(k), you generally must pay back what you borrow with interest within five years Opens a new window. — and if you leave your job, the amount is due in full immediately.
Credit card balance transfers can be even more difficult to manage: The low or 0% interest rates are commonly only offered for a promotional period, which is often between six months and two years. For many people, this window is too short to fully pay off the balance before the interest rate increases steeply.
With home equity solutions, lenders will often allow you to tap up to 80% of your home’s equity. For someone who owns a home worth $250,000 and has fully paid off the mortgage, that means they can potentially access to up to $200,000* a robust amount to consolidate debt and possibly pursue other financial goals, such as a home improvement project. Many lenders have maximum loan amounts
With a 401(k) loan, you can borrow up to 50% of your vested account balance up to a maximum of $50,000 Opens a new window. — and that’s only if your plan permits participants to borrow at all. Personal loans are typically available in even smaller amounts. It can be difficult to qualify for a large personal loan, and many lenders don’t offer amounts above $50,000.
While many balance transfer credit cards are offered with no cap, you’ll pay more in fees the more you transfer because most balance transfer fees are calculated as a percentage of the amount transferred. For example, if you transfer $10,000 and the fee is 3%, you’ll pay a $300 fee, and if you transfer $50,000, you’ll pay a $1,500 fee.
Credit card balance transfers are typically only applicable to existing credit card debt; it can be difficult to transfer the balance from your auto loan, for example, to a new credit card with an attractive interest rate. Personal loans offer more flexibility, though not all lenders will allow you to pay off student loans with the funds.
Home equity solutions offer a greater degree of flexibility, generally allowing you to consolidate credit card balances, student loans, and other types of debt. Many people appreciate the option to wipe out their existing debts all at once and begin to breathe easier right away.
There’s more than one way to use the equity in your home to consolidate debt, including the Figure Home Equity Line. Our unique solution has a fixed interest rate and gives you full access to your funds up front, while also enabling you to access additional funds once you start to pay down your original disbursement. Plus, you’ll be able to access the full amount of your loan often in as few as 5 days.2 Learn more about Figure Home Equity Line Opens a new window. and see if it could help you consolidate debt and improve your financial health.
* The maximum loan amount of a Figure Home Equity Line is $150,000.