A borrower can reduce his debts in the following
ways:
- Refinancing the different loans.
- Consolidating different loans into one single
loan.
- Reducing the credit card debt
- Repositioning the current assets to pay off the
debts
- Using a home equity loan or home equity line of
credit (converting nondeductible interest to
deductible interest)
- Prepaying a mortgage or any other loan.
Refinancing:
Refinancing can help in saving the money to a large
extent as the interest rates have gone down to a great
extent. The loan term can also be increased which will
help in reducing the monthly payment.
However, the extension of the term of a loan
increases 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 (converting nondeductible interest to deductible
interest)
The interest a person pays on the 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 abused 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The funds can be withdrawn from the investment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.