When you’re struggling with debt, consolidation loans can be a great way to start the process of handling things positively. Consolidation loans can help reduce the amount you pay per month to get out of debt, making it easier for those with a lot of debt and a tight budget. Keep reading if you’re interested in learning more about debt consolidation loans.
All About Debt Consolidation Loans
In the scenario where you have several different debts to juggle—perhaps some student loans, credit cards, and a car payment, the many different due dates and payment amounts can get difficult to manage. It’s easy to forget one without careful monitoring and planning. To help the situation, you could take out a consolidation loan to combine all of your debt into a single payment. Your payment plan is also often lengthened, which means you can pay less per month and still continue on the journey to getting out of debt.
Consolidation loans do not necessarily always guarantee a lower balance. In fact, your balance could even increase, depending on the type of consolidation loan you take out. With that said, consolidating your debt is still a helpful method due to the benefits of making things simple.
How Do Debt Consolidation Loans Work?
When you work with a consolidation loan provider, the lender will attempt to purchase your debt at a lower rate from your creditors. While they do typically succeed at this, there is no absolute guarantee. It should also be noted that the interest rate will likely be raised—especially if you have a poor credit score going in or a history of frequently making late payments.
Things to Remember with Consolidation Loans
When you take out a consolidation loan, the single payment can make it easy to forget how much debt you actually have. This misconception could cause you to feel comfortable taking out another loan, putting you further into the hole. You should only take out a consolidation loan if you’re confident that you can stay on the track to getting out of debt.
Another thing to remember is that consolidation loans can reflect poorly on your credit and financial reputation, which means that any future loans you take out could come with high interest rates. By taking out a consolidation loan, you are essentially telling future creditors that you were unable to manage your debt on your own, which could reflect poorly on you in future financial situations.
You shouldn’t let these things scare you away from consolidation loans, however, as there are still many circumstances where they may be the best option. For example, those who are otherwise considering bankruptcy would benefit greatly from taking out a consolidation loan instead. As long as you continue to pay off your debt and make those payments on time, your financial situation will improve.
Different Types of Debt Consolidation Loans
Now that the basic information about consolidation loans has been covered, the next step is to learn about the different types you might be able to take out. The best type for you will depend on your personal situation and circumstances, so take a look at all of them and think carefully before you decide.
- Home Equity Loans. A home equity loan is a secured loan that uses your home as collateral, which is an easy way for many people to take out this type of loan. However, there is also great risk in this loan, as you could lose your house if you fail to keep up with paying off the debt.
- Credit Card Balance Transfer. This type of loan allows you to consolidate your various credit card debts into a single card. Although some banks may offer low rates and other offers on these transfers, they are often a gimmick. You should be careful when choosing one of these loans and always look at the duration period before applying.
- Personal Loan. One option is to take out a personal, unsecured loan and use that to pay off all your debt. This option should only be taken by those with good credit, however, as you might be stuck with a ridiculously high interest rate otherwise.
- Debt Consolidation Loan. Legitimate debt consolidation loans may be the best option you could choose, compared to the others. These are often offered by banks or credit card companies who buy your old loan for a lower rate.