By Susan M. Keenan …©2010

If you have a lot of debt spread around quite a few credit cards, installment loans, and IOUs, you might just be wondering if now is the time to pick up a home equity loan to pay it all off. Should you? Are there any good reasons for doing so? Is there a greater risk involved for your financial status if you do so? Won’t it be easier to have all of your bills lumped into one?

Obtaining a home equity loan for the purpose of paying off all or most of your debt is often referred to as debt consolidation. It is an easy way to lump all of those monthly bills into a single monthly payment. Nonetheless, it is important to take a long look at both the benefits and the disadvantages of taking out a home equity loan to pay off existing debts.

The Benefits of Consolidating Debt with a Home Equity Loan

A home equity loan can be used to corral your out-of-control debt into a manageable monthly payment. Your bills suddenly become less expensive to pay off each month.

The interest rates that are attached to home equity loans are generally lower than the interest rates that are attached to credit cards and installment loans. The savings in interest alone can make it easier to pay off your collective debt in a shorter timeframe.

Since you only have a single payment to make each month, you save time that used to be spent paying a bunch of bills.

If you are able to make each monthly payment of your home equity loan in full and on time, you can slowly improve your credit score. A better credit score can make it easier for you to obtain new credit when circumstances necessitate doing so.

The Disadvantage of Consolidating Debt with a Home Equity Loan

Using a home equity loan to cover or pay for all of your other debt means that you are trading in unsecured debts for a single secured debt. Instead of only risking your credit score if you cannot make your payments, you are risking your credit score and your home. If you fail to pay off your home equity loan, you place yourself at risk of losing your home since that is what you used to secure the loan.

Intro: Should you replace your high-interest rate debts with a smaller-interest rate home equity loan? There are pros and cons related to this strategy. What are they?