4 Loan Options to Help You Consolidate Your Debt
Having and paying off debts can be taxing and stressful. When it’s not managed correctly, all the stress and worries can affect your productivity at work, strain your relationships, and may even lead to health issues.
In such a case, it’s important to never let your debts chain you. Otherwise, compounding interest on your loans will pull down your finances along with your peace of mind in just a matter of months.
But, what can you do if you’re already going down that debt spiral?
A Debt Consolidation Loan Could Be the Answer
If your multiple debts bog you down, merging them into a single loan with lower-interest can help put you to a straightforward and debt-free path.
Debt consolidation enables you to combine various high-interest loans into a single, new loan with better terms and lower interest rate. Since less of your payments are going toward interest every month, you can now save money in the process and pay your debt faster.
No need to worry if you don’t have an excellent credit score as there are debt consolidation loan options available for you. Debt consolidation loans actually cater borrowers from all walks of credit score profile.
What is Debt Consolidation?
A debt consolidation, in its most generic term, is a method that integrates all of your debts into one loan for a low-interest rate.
It’s quite advantageous, especially for borrowers whose debts come with high-interest rates. Integrating debts in this manner makes it easier for you to settle your monthly bills and enables you to lower your monthly payment.
With that, here are different types of loan options to help you consolidate your debt. Take a read!
1. Home Equity
This type of loan works by using your home’s equity as collateral. Typically, you need to have good credit, and of course, a fair amount of equity to be eligible for a home equity loan.
Home equity loans have lower interest rates compared to other types of loans. However, it places your home on the line for your credit card debt. You will face foreclosure in case the payments become unaffordable. As such, it’s a risky idea, in general, to use home equity loan to consolidate your debt.
If you’re a risk-taker, this loan option might fit you.
2. Credit Card Balance Transfers
Through a credit card balance transfer, you’ll be able to move your credit card balances to a single credit card for a low-interest rate. The interest rates from balance transfers are usually promotional rates that will expire after six months.
If you want to go after this option, be sure to know the regular interest rate that comes into effect for the remaining balance and when will the low rate expires. Moreover, you’ll need a credit card with a sufficient credit limit to hold all your credit card debt if you will use a credit card balance transfer as a debt consolidation loan.
Just like any other loans, using a balance transfer to consolidate your debt has its drawbacks. It might take a toll on your credit score. Placing too much debt in one credit card increases your credit utilization, which could negatively affect your credit score. Fortunately, your credit score can bounce back once you pay the balance.
3. Personal Loan
It’s an unsecured loan with fixed payments within a fixed period of time. A personal loan is probably one of the easiest options for debt consolidation. There are many online lending platforms like Credit Ninja that offer personal loans for competitive rates.
But make no mistake, you can still get stuck in a bottleneck as lenders will assess your personal credit profile to determine if you’re qualified. If your credit score is bad, you will not be approved, or if you do, it comes with higher interest rates.
Know it that taking a high-interest rate personal loan might allow you to combine your balances. But, in the long run, it will be hard for you to save money.
4. Debt Consolidation Loan
Banks and credit unions are the conventional means to get a debt consolidation loan. And, in case you don’t know, debt consolidation loans may vary. As such, it’s critical that you make a thorough choice.
A debt consolidation loan is paid through installments along with the negotiated interest rate that you and your lender agreed upon. Normally, the repayment period takes 3 to 5 years to get fully repaid. But the key element here is how much interest was charged.
Lenders will examine your credit score to gauge the interest rate they will charge to you. It’s very likely your credit score will stumble if you’re falling late with paying your credit card debt.
Further, be aware too, that lower monthly payment is achieved through increasing the repayment period. This means that you’ll have to pay for higher interest overall due to the repayment timeline.
Before Choosing a Loan Type
To give you a clear idea, going for a debt consolidation loan does not get rid of your debt. It only shuffles them around to make it easier for you to pay. It may tempt you to borrow more as you’ll also feel like you have less debt.
The best thing to do is practice financial discipline and eschew from borrowing until you completely repay your debt consolidation loan. Even then, it’s equally important to use critical judgement in taking an additional debt.
Understanding debt consolidation programs and other debt settlement programs are the first steps to identify which payment option best suits you. We have different circumstances relating to debt, which calls for different payment options. Take your cue from the loan options above.