Four Types of Debt Consolidation Loans to Consider

Having a significant amount of debt is overwhelming, especially when the interest accruing on unpaid balances is high. Debt consolidation offers a way out, by reducing the interest paid on debts, by streamlining multiple monthly payments into a single payment, or a combination of the two. However, debt consolidation comes in many different forms, and with varying costs. If you’re considering debt consolidation as a way to help eliminate your credit cards, loans, or other obligations, here are the four types of solutions you should consider.

Home Equity

Homeowners have several options when it comes to implementing a debt consolidation plan. As the mortgage balance on a home is paid down and the market value of the property rises, the difference between the two known as home equity becomes available. Most homeowners do not realize the potential of home equity until selling a property, but it can be used for debt consolidation without taking this drastic step.

To tap into home equity, homeowners can use either a home equity loan or a home equity line of credit. With a home equity loan, a financial institution provides a fixed-interest, fixed-payment loan up to a certain amount based on the available equity in the property. Homeowners may use the funds for whatever they see fit, including consolidating higher interest rate debts. Typically, a home equity loan has a lower interest rate and a longer repayment term than other debt consolidation options. This is because the home itself is used as collateral. With a home equity line of credit, funds are made available as a flexible line of credit instead of a fixed-amount loan. Rates are still relatively low, and the funds can be used for any expense.

Cardholder Options

Another option for debt consolidation applies to credit card holders. If you have a current credit card with a minimal balance, or you qualify for a new credit card, a balance transfer option may be ideal. A balance transfer involves using the credit line of one card to pay off the balance on another card, typically one with higher interest.

Balance transfer offers from credit card issuers are promotional in nature. They provide a zero or low interest rate for a set period, such as six, 12, or 18 months. During that time, cardholders pay no interest on the unpaid balance. This can offer significant savings over time. However, there are balance transfer fees ranging from 1 to 5% of the amount transferred, and the short timeframe for repayment can mean high monthly payments.

Personal Loan

You may also use a personal loan for debt consolidation. Many different lenders offer personal loans that provide a lump sum payment in exchange for fixed principle and interest payments over time. A personal loan does not require collateral like home equity, and it does not involve opening a new credit card to complete the debt consolidation. Interest rates on personal loans may be higher than other options available, but they are often lower than standard credit card interest rates. The fixed monthly payment and fixed interest rate make it easy to pay off balances. However, borrowers must have relatively strong credit to qualify.

Debt Consolidation Loans and Services

A loan specifically called a debt consolidation loan differs slightly from a personal loan in that the funds distributed are meant to be used for paying off other debts. Interest rates on debt consolidation loans may be slightly higher or lower than a personal loan, depending on the lender, and qualification requirements may be less stringent than personal loans. Debt consolidation loans come with a range of repayment terms, typically from three to five years, and they offer a fixed interest rate and fixed monthly payment to make management easier.

There are also debt consolidation services, which differ from loans altogether. Companies like National Debt Relief offer debt consolidation that includes counseling for debt management and debt settlement with creditors. Debt settlement involves negotiating with current lenders for a lower balance, payment amount, or interest rate to help eliminate debt quickly. This is not a loan but an alternative for debt consolidation for some borrowers.

Debt consolidation can be a great tool for getting out from under the burden of debt in an efficient and cost-effective way. It is important to weigh the pros and cons for the best debt consolidation loan option before deciding which route is best suited for your financial needs.

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