|Debt consolidation is another option available to many consumers that can be used to tackle high levels of credit card and other consumer debt. Using this strategy, consumers apply for a debt consolidation loan from a bank or other lending institution and use the proceeds of the loan to pay off all other debts they may have. By consolidating your debt you can simplify your finances. Assuming you pay off all your other debts, you will only have a single monthly payment. Oftentimes, you will also be able to lower your overall interest rate enabling you to pay down your debt faster.|
|When consolidating debt with a loan, borrowers have two primary options to consider:|
|A secured loan uses an asset as collateral, such as real estate. Secured loans usually have a higher approval rate and normally come with a lower interest rate. However, if the loan is not repaid as agreed, it puts the collateral at risk. An unsecured loan doesn’t require pledging collateral but they normally come with a higher interest and are more difficult to obtain|
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DIFFERENT FORMS OF DEBT CONSOLIDATION
There is more than one way to reduce debt using debt consolidation and no one option is the best for every situation. Each option has advantages and disadvantages. If you have debt, you should explore all your options and weigh the pros and cons before making a decision on which direction to go. There are four major types of debt consolidation loans:
Personal loans may offer a lower interest rate than regular credit cards but normally have higher rates than a home equity loan. They may also be harder to qualify for than a home equity loan. With a home equity loan, the lender knows that if the borrower defaults, they may be able to collect by seizing the collateral.
HOME EQUITY LOAN
A home equity loan enables you to tap the equity in your home. Since the loan is secured by the equity, home equity loans may offer lower interest rates and may offer a higher approval rate than a personal loan. However, if you use a home equity loan to pay off existing credit card debt, you are converting unsecured debt into secured debt. This puts your house at risk if the loan is not paid back.
If you can obtain a balance transfer from your credit card, it may be a great option to help you reduce your debt. Balance transfers often offer a promotional low interest or no interest period. If you are able to pay off the balance during the promotional period, they can be a great way to help you get out of debt. One caveat to be careful about is that normally interest will start accruing at the old high rate once the promotional period expires.
Consolidation loans are not that different from a generic personal loan. The only difference is that these loans are offered specifically to pay off other debts. In some cases, the lender may require to send the check directly to the other creditors instead of sending them funds directly to the consumer to ensure that the debt is paid off. These loans can also be a great option to pay debt quicker assuming you can get a reasonable and lower interest rate.