People consolidate loans to reduce monthly payments by obtaining a lower rate of interest. Two of the most common consolidation practices are transferring credit card debt into a lower interest card and taking out a home equity loan to pay off outstanding debts.

In order to consolidate loans, borrowers must qualify for a new loan. Banks have tightened lending criteria since the mortgage meltdown and now require borrowers to have high FICO scores, solid employment history, and a strong record of paying bills on time.

Loan consolidation can provide opportunity to reduce debt, but borrowers must take time to calculate the true costs. While consolidating can lower monthly payments, the repayment period of paying off debt is extended and actually costs debtors more money in the long run.

It can be helpful to get current credit reports from each credit reporting agency and determine if credit blemishes exist. Consumers are entitled to one complimentary report from each agency per year under the Fair Credit Reporting Act (FACT) which can be ordered through AnnualCreditReport.com.

Most types of loans can be consolidated, but the most common include: mortgage, automobile, education, and credit cards.

Consolidating student loans can be tricky. Federally funded college loans cannot be consolidated with privately funded student loans or other types of loans. It is recommended to consult with a college loan consolidation advisor to gather facts and weigh the pros and cons of this option.

Consumers carrying car loans and credit card debt often consolidate loans together to obtain better rates. Some people prefer to transfer credit card debt into a lower-interest card while others apply for home equity loans.

Financial expert, Suze Orman suggests it is a poor financial decision to use real estate as collateral to pay off existing debt because this places the property at risk for foreclosure if loan default occurs.

Two types of home equity loans exist. The first is simply a home equity loan which is similar to a mortgage note. The second is a home equity line of credit (HELOC) which provides homeowners with an open line of credit that can be borrowed against on an as-needed basis.

Home equity loans typically are assessed a fixed rate of interest and monthly installments remain the same until the loan is paid off. HELOC loans are assessed an adjustable interest rate which is charged against the amount of borrowed funds.

Home equity loans and HELOC accounts can provide debt relief, but also place real estate at risk. Using real estate as collateral can have serious consequences if borrowers default on home equity loan installments, so careful consideration must be given.

Borrowers should strive to reduce monthly installments by at least 10-percent when consolidating loans. The primary objectives are to payoff high interest loans and reduce monthly installments without extending loan terms.

A less common approach to loan consolidation is cash-out refinancing. This option is typically reserved for homeowners possessing substantial home equity. Homeowners apply for a new home mortgage that provides funds to pay off outstanding debts.

It can be advantageous to consult with a loan advisor before attempting to consolidate loans. At minimum, conduct research to comparison shop lenders, interest rates, and other types of debt reduction strategies.

Author Bio: Simon Volkov is a California real estate investor and author who provides extensive personal finance strategies to reduce debt. Topics include: how to to consolidate loans, student loan consolidation, home equity loans, and budgeting. Discover more debt management strategies at www.SimonVolkov.com.

Category: Finances
Keywords: consolidate loans,college loan consolidation,home equity,home equity line of credit,refinancing