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Debt Management Guide 2008
Danger ahead
Debt problems don't just suddenly appear. If you're alert for signs of trouble, you can probably avoid them.
Danger ahead
The dangers of debt consolidation


Debts and debt consolidation strategies go together in the American economy like peanut butter and jelly. You don't need a financial planner to comprehend the basic logic: Combining multiple payments into a single monthly check lowers interest rates and can positively impact your FICO score.

Ways to consolidate

"It's easier to take on the 1,000-pound gorilla who comes to the front door as opposed to 20, 50-pound gorillas pouring in through separate doors and windows," says Boyce Watkins, author of  "Financial Love-Making 101: Merge Assets With Your Partner in Ways That Feel Good," and a professor who teaches personal finance planning at Syracuse University. "Psychologically, consolidation is very comforting."

Americans borrow between $400 billion and $500 billion a year against home equity alone, according to Bob Walters, chief economist at Quicken Loans.

How much of that goes toward paying off debt versus home improvements and vacations is a guess, but it's safe to say a lot. After all, the Remodeling Future Program at the Joint Center for Housing Studies at Harvard University reports we spend nearly $250 billion on improvements and repairs to our actual houses -- leaving a gap of $150 billion to $250 billion unaccounted for each year.

That "loose" money is a double-edged sword. "The problem is that people use debt consolidation like a crutch," says David Latko, a Chicago-based financial adviser and manager and author of "Everybody Wants Your Money."

"They know it's out there, they take advantage of it, and are then free to accumulate more debt." 

How you consolidate your loans can make the difference between victoriously kissing your debt good-bye and kissing your financial future bye-bye.

Home equity and refis
The good news:  Home equity loans come in several flavors. First, you can refinance your original mortgage for a larger amount, basically trading in equity on the spot.

Other borrowers choose to take out a second, separate mortgage. On this path, you can apply for a home equity loan where the bank pushes the entire loan amount across the counter at a fixed interest rate. Or you can opt for a line of credit where you only pay interest on the amounts you draw, but the interest rate varies, tied to the prime rate.

The tax angle also puts a smile on a CPA's face. Because the debt is secured by the home, Uncle Sam is willing to pay some of the freight in the form of tax-deductible interest.

-- Updated: June 16, 2008
 
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Compare Rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.32%
Personal loan 12.08%
$30K Home equity loan 4.99%
Rates may include points
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