There are a few different types of debt consolidation loan programs you can find, including credit card balance transfers, personal loans, and lines of credit or home equity loans. Each one has its own benefits as well as drawbacks, and you should compare the different types to find which is the one for you.
Here's a quick look at a few debt consolidation loan types.
How Does a Debt Consolidation Loan Work?
A debt consolidation loan is very straightforward. You take out a loan. Then you use the funds to pay off any debt you have outstanding. Finally, you pay off your debt consolidation loan as per the pre-agreed upon monthly repayment schedule. Like we said, very straightforward. Now, let’s dig a little deeper.
How to Pick the Right Debt Consolidation Loan for You
There are a few different types of debt consolidation loan programs you can find, including credit card balance transfers, personal loans, and lines of credit or home equity loans. Each one has its benefits. Here's a quick look at each one:
Personal Loans:
These are the easiest to work with and get approved for, especially now that marketplace lenders are cropping up everywhere (making it even easier to find competitive rates). With so many lenders available today, consumers can shop around for deals, get a price quote without hurting their credit, and compare quotes from multiple lenders from the privacy and comfort of their homes.
Credit Card Balance Transfers:
If you find a credit card that offers a 0% introductory offer to transfer the balance of your other credit cards onto the new one, this can be a good option. Be careful, though. Often these introductory offers are simply a bait and switch, and you end up with a much higher interest rate than you started with.
Home Equity Loans:
Home equity is basically taking a loan off of the value of your home. The benefit here is that you already have the house, so you're likely to get easy approval and a low-interest rate. Plus, you can deduct the interest. But the major disadvantage here is that you are using your home as collateral, so if anything goes wrong, you are literally out of house and home.
Choosing the Right One
Which debt consolidation loan is right for you will depend on your situation, including what type of debt you currently have, how good your credit score is, and whether or not you have a cosigner to come along for the ride.
Of course, the biggest deciding factor you'll be working with is the interest rate that the lender in question will charge you for your debt consolidation loan. Remember, the goal is to lower your overall and/or monthly payments by accepting a loan that comes with a lower interest rate. Before you sign anything, make sure the loan has a lower interest rate. Not good with numbers? Here's a simplified example to help illustrate how big a role interest rates play in your overall debt repayment portfolio.
Let's say that you get approved for a credit card. The next time you go to a store, you use your card to pay for your purchase. So far, you've received goods or services and paid nothing for it. The credit card company has footed the bill, so to speak. At the end of the month, you receive a bill from the credit card company telling you how much you owe. Credit card companies make all of their money by charging you interest on the money you used to make the purchase. The more interest they charge, the more money you pay and the more they make.
Credit card companies are even smarter because they don’t make you pay off everything all at once. Instead, they tell you to pay them a minimum amount each month of what’s owed, and the rest of the balance gets carried over to the next month. Why is this smart? Because for every dollar you keep on your balance, you are paying interest. The more money on your tab, the more you are paying in interest. So, if you have $500 with an interest rate of 15%, you’ll end up paying (as an example) $75 in interest payments. If you leave $450 of that balance over to the next month, you’ll end up paying interest on the $450 (or $67.50) in the following month. And it continues until you’ve paid off your full tab.
(Note: this is an oversimplification to illustrate how interest payments work in a very basic manner. The exact numbers work out differently due to various factors.)
It's most encouraging to note that with just a few points shaved off your interest rate, you can take years off of your debt repayment plan.
Getting Out of Debt is Doable Now!
While debt is a common state of affairs in today's economy, it doesn't have to be your fate. Debt consolidation loans are available to help alleviate this burden. Personal loans offer the most flexibility, making them an ideal choice for debt consolidation loans. They're easy to get approved for, allow you to use the funds for anything you choose, and come with competitively low-interest rates. Do some comparison shopping and find your own financial freedom now.
