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Debt consolidation is a way of financing. It allows you to pay off high interest debts with one low interest loan. Instead of multiple payments, you just have one payment. It simplifies bill paying, saves money, and potentially helps you save your credit. It’s effective for unsecured debts like credit card debt, medical bills, personal loans, and more. Consumers can roll their unsecured debts into a single bill, and then use a debt consolidation loan to pay off the amount owed. The advantages of debt consolidation is that the debt consolidation loans usually have a lower interest rate and there’s only one payment due each month.
Banks, credit unions, and online lenders are the primary lenders for debt consolidation loans. They usually have a fixed interest rate, monthly installments, and last 2-5 years.
How to get a debt consolidation loan
Consumers are well aware of the fact there’s a number of options available for debt consolidation. Debt consolidation loans don’t eliminate debt. They restructure the debt, making it more manageable. Before looking for a debt consolidation loan, do homework and look into how the process can be easier. The chances for success are higher if you can identify the bills you want to consolidate, examine your budget, order your credit report, and create a game plan. Typically secured debts like mortgages don’t qualify for debt consolidation.
Secured vs Unsecured Debt Consolidation Loans
Secured debt consolidation loans are like secured personal loans. They are backed by collateral, like a home, car, or property.
Unsecured loans are backed only by your promise to repay. If you want to go to the unsecured loan route, there are many online lenders who can help.
Secured Loans are easier to get, have a higher borrowing amount, lower interest rate, and the interest might be tax deductible. They have longer repayment terms, and you risk the losing of collateral.
Unsecured loans have no asset risk, have shorter repayment terms, but are harder to obtain, with a lower borrowing amount
There are a few major types of loans: home equity loans, credit card balance transfers, loans from family/friends, and unsecured personal/debt consolidation loans.
Home equity loans, are a popular route. The interest on these loans is less than what you pay credit card companies. In Feb 2019, the interest rate on home equity loans was only around 5.5%, while the average interest rate on credit cards was 17.5%
Credit card balance transfers allow you to transfer the balance from all of your credit cards and pay them off with no interest, for an introductory period of 6-24 months. The major issues are:
To get this, you need a credit score over 740 for the best deals. You need at least a 680 or higher to qualify for the rest. Any score under 680 is unlikely to get 0% interest.
Debt consolidation loans are a great way to improve your credit score if you use them correctly. When you take out your consolidation loan, your credit card debt will be paid in full, and now you can focus on a single new loan payment. If you must take out a consolidation loan, it’s safe to assume you’ve been hit with delinquent payments. Timely payments on the new loan can help you improve your credit score over time. If you don’t have a strong credit score, you should contact a credit counseling agency to review your other options. They might recommend a debt management program which can help set you up on a budget, and help you pay off your debt within a few years.
Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.
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