If you feel like you’re drowning in debt, you’re not alone. Many people have multiple high-interest credit cards with ongoing balances in addition to a car loan or other debts. Keeping up with the assortment of monthly payments can be overwhelming.
Debt consolidation offers a way to get your head back above water. Rather than making several payments each month, debt consolidation allows you to roll all your high-interest debts, into one, lower-interest payment. Another bonus? It can enable you to reorganize your debt in a way that allows you to pay it off faster and often with less expense.
There are a few different ways to consolidate your debt.
You can take out a personal loan; however, depending on how much debt you have, you may not be able to borrow the full amount of your debt, and you'll likely pay a high interest rate.
If you own a home, you can take a loan using the equity you've built up over the years. The advantages of using a home equity loan over a personal loan to consolidate debt are they often offer significantly lower interest rates; you can generally get a longer loan term to pay off your debt (and lower your monthly payment); and depending on how much equity you have, you can often access larger loan amounts than an unsecured personal loan allows.
How can a home equity loan help eliminate debt?
Your home equity is the value of your home that you own outright, or the current value minus the amount you still owe on your mortgage. If you've been paying your mortgage consistently over time, you've paid down the principal of your loan, boosting your equity. In addition, if your home's value has increased during the time you've lived there, your equity has also increased.
With both home equity loans and lines of credit, you’re able to borrow against the equity in your property, using your home as collateral. The loan amount is determined by the value of your property. In most cases, lenders will allow qualifying homeowners to borrow up to 80 percent of their assessed equity.
By tapping into your home’s equity, you can consolidate multiple debts into one easy and affordable monthly payment. Not only that, but because home equity loans are secured by real property (your home), lenders are able to charge significantly lower interest rates than with other forms of debt, such as personal loans or credit cards.
For instance, if you are carrying balances on three credit cards with interest rates of 19 percent, 21 percent and 24 percent, you're making three payments each month, with a significant amount of your payment going towards interest. However, if you paid off all three cards with a home equity loan, you'd be able to make one payment each month at a much lower interest rate. Score!
How does a home equity loan compare to a personal loan?
A personal loan is unsecured debt (similar to a credit card). What does this mean? It means that there's no physical asset securing the loan, unlike a car loan (which is secured by the car) or a mortgage loan (which is secured by the property)1navigates to numbered disclaimer.
Because personal loans are unsecured, they usually command higher rates of interest. For instance, in January 2024, interest rates for personal loans averaged between 10.84 and 30.51 percent, according to Business Insider. On the other hand, interest rates for home equity loans are similar to mortgage rates, which remain much lower. Another win!
Not only are the rates higher for personal loans, but it can be more difficult to qualify for a personal loan that is large enough to pay off your consumer debt. Because personal loans are unsecured, most banks are unwilling to make personal loans for more than $50,000 – and for borrowers with less than stellar credit, the amount may be much less. If you have $40,000 in credit card debt, that revolving debt may be dragging your credit score down, and banks may be unwilling to lend you the full amount to consolidate all your debt.
With a home equity loan, the amount you can borrow depends on the amount of equity you have in your home. For instance, if your home is worth $200,000 and you still owe $100,000 on the mortgage, you have equity of $100,000. Most lenders will allow qualifying borrowers to borrow up to 80 percent of the amount of their home's equity, so you could potentially borrow up to $80,000 to consolidate other debt—and pay it back at a much lower rate than you would with a personal loan.
Home equity loan or home equity line of credit?
While home equity loans and home equity lines of credit are similar in that they are secured by your home, they are very different in how you get your money and how much you may end up paying over time. Most home equity loans provide your entire loan amount up front with a fixed rate of interest. Home equity lines of credit, on the other hand, act more like credit cards, i.e., you take money as you need it and the interest rate is often variable.
Home equity loans are the best option for debt consolidation due to their fixed interest rates.
Ready to consolidate?
If you're considering consolidating your debt with the home equity you've built, Figure’s all digital application makes the process quick and simple. Our unique product solution combines the best characteristics of a traditional home equity line of credit and a home equity loan. You get the entire loan amount upfront, a fixed interest rate2navigates to numbered disclaimer, and have the option to make additional draws once you've repaid part of your balance. Plus, you can get approved in five minutes and funding in five days3navigates to numbered disclaimer.
