In our contemporary consumption society, stories of Americans bearing the burden of multiple debts are no longer making headlines. This is because this taxing predicament is becoming increasingly commonplace, with over-indulgence in credit from automobile loans and home mortgages to charge cards threatening to become the norm. Borrowers encumbered with so many different payment obligations find it challenging to manage their finances, and come April 15th, many end up entangled in a web of tax debt. Fortunately, there is a silver lining, and IRS tax relief comes in the form of debt consolidation.
Through debt consolidation, consumers can regain control of their finances by taking out a new loan to repay several current debts. Their monthly debt payments are combined into a single manageable monthly bill. Debt consolidation is most frequently achieved through a secured loan, which requires the applicant to pledge an asset as collateral (i.e. a home). A home equity loan is one such form of secured credit, providing for a mortgage on real property. Since the lender's risk diminishes due to the presence of collateral, the debtor benefits from a lower interest rate. Borrowers may utilize the equity in their home to consolidate high-interest credit card debt, auto loans and personal loans into a low-cost home equity loan which boasts a lower interest, greater affordability and reasonable monthly payments. They may consolidate outstanding debt by obtaining a second mortgage on their home or refinancing their first mortgage.
From the taxation standpoint, borrowers can reap substantial savings by utilizing a consolidation loan. What follows is an outline of the tax benefits that debtors may realize by choosing to consolidate:
1) A Lower Tax Bill
A home equity loan for debt consolidation can significantly reduce a borrower's monthly payments, which in turn contributes to a lower IRS debt.
2) A Tax-Deductible Loan Interest
Consumers may obtain IRS tax help by writing off the interest they pay on the mortgage or debt consolidation loan. In other words, the interest on a home equity loan is tax-deductible. Such a tax benefit is unavailable with other types of unsecured consumer debt such as personal loans, car loans and credit cards. Home mortgage interest is defined as the interest that debtors pay on funds borrowed, for which they pledge their home as security. Taxpayers may deduct up to $100,000 in interest on a consolidation loan. This translates into tremendous savings, since they are trading in their costly debt for a cheaper consolidation loan.
3) A Lower Taxable Income Due To the Reduced Interest Amount
4) A Lower Income Tax Rate
Debtors who pursue debt consolidation also benefit from placement into a more advantageous tax bracket, which further reduces their tax burden.
5) A Lower Rate of Interest
The interest rate on costly credit such as charge cards is usually of a double digit, typically in the range of 16-28%, whereas that on a home equity loan for debt consolidation is under 9%. Therefore, taxpayers can expect immediate and considerable savings when taking out a consolidation loans to pay off the outstanding debt, since the interest rate on longer-term loans are lower. By consolidating their debt, consumers often reduce their interest rate by as much as 50%, and this is reflected in their monthly payments. A lower interest rate contributes to reduced taxes and tax debt elimination.
6) Increased Cash Flow and Faster Debt Repayment
With tax debt consolidation, borrowers pay less interest and consequently have more money in their pocketbook. With more cash on hand, they are able to pay off their home mortgage and remaining debts in a more expeditious manner.