Consolidation Loans are usually the first go to for many consumers when trying to eliminate debt. This is where you takes multiple debt obligations and combines them into one debt. This reorganization of your debts can help eliminate the problems that come with juggling multiple payments and communications with creditors, but it does not address your spending habits. Debt consolidation is best for those with high credit scores and a clear plan for avoiding debt in the future.
Debt consolidation is an increasingly common strategy that consumers are using to address high levels of credit card and other debt. Typically, consumers obtain a debt consolidation loan from a lending institution and use it to consolidate all outstanding debts into one loan. When you consolidate debt, you’re left with a single monthly payment, which is often at a lower interest rate. The result is that it’s easier to manage your outstanding debt so that you’ll be in a better position to pay it off.
What Are Some Consolidation Options Available?
When consolidating debt with a loan, borrowers have two primary options to consider: secured and unsecured debt consolidation loans. A secured loan uses some sort of property as collateral, such as your home. The collateral makes it more likely you’ll qualify for the debt consolidation loan and get it at a lower interest rate. However, if you become unable to repay the loan, your property could be at risk. An unsecured loan doesn’t use any of your property, so you don’t have to worry about losing anything if you’re unable to keep up with monthly payments. However, unsecured debt consolidation loans usually require a high credit score to qualify, something that people struggling with high levels of debt usually don’t have.
What to Look for In a Consolidation Loan
When it comes to looking for a consolidation loan to consolidate your existing debt you need to look for 2 key things to be available for you before you accept it. 1. Is a credit limit higher than the existing debt you want to consolidate. 2. A lower interest rate than what you currently have. Otherwise you would be defeating the purpose of getting the loan in the first place. If consolidation is all you seeking then just open a new bank account and set all your monthly payments on an auto draft from that account every month and throw money into it that will cover those payments once a month. So make sure your loan option is good before deciding to give away your hard earn money for a slight convenience. Over the time of a few short years your money is thrown away even you have a very low interest rate which is hard to get if your credit utilization is already high.
Consolidation Loan Types
Personal (Unsecured) – This is a loan you receive that is based on underwriting guidelines for whichever lender you choose to apply to. More than often these lenders are looking to see if your current Debt -to – Income, Debt-to-Credit Ratio, Utilization, Credit Score and other underwriting guidelines are required are substaintial enough to meet their qualification fo giving more debt on top of the debt that you currently owe. Remember lenders are expecting that money back and interest, so often times it doesn’t make sense for most indiviudals to get a loan on top of the loans that they already borrowed unless it is going to lower their payments and interest AND they have the ability to pay at least twice what they are currently paying on current debts
Personal Loans (Secured) – A personal loan that is secured is a loan you receive for turning over an actual item(s) that may have value to surrender in the event you do not pay the loan back. Many time lenders will have you turn over things such as Title to your vehicle, expensive Jewlery, House hold goods (laptops, Televisions, Mowers, RV’s etc) to obtain a loan from them. With this you may not need to have a high credit score because the lender is in the position to reposses those items should you default. However, in some instances lenders may not care to even reposses those items due to possible value decline and/or more. However, a secured loan is not always a viable optoin to get out of debt due to those rates on those loans being a little bit higher than usual.
Home Loan – This option is for homeowners who have equity built into their home or already have their home paid off. This would be an option for those looking to but their debt into a lower interest loan because often times the rates here are lower because the loan is secured by your home. So if you default the lender can either put a lien on your home or take the property to pay off the loan no matter how big or small the balance may be. This is also done through home equity lines of credit, reverese mortages, and others but ultimately it is the same outcome.
However, It is not always gauranteed that a bank would actually extend this to you just because you own the home or have built equity into it. They could still deny you for credit reasons. Also, many financial professionals would not advise taking out oa home loan to pay off debt, especially high interest credit cards. Not only are you not tackling the root problem but now you have risked losing your home and turned unsecured debt into secured debt which is one of the worst things to do.
Remember that becoming debt-free is a process that takes time and commitment. Stay focused on your goals, stay disciplined with your budget, and celebrate each milestone as you make progress toward financial freedom.