It’s enormously difficult to pay off debt, particularly when dividing a limited amount of money among different loans and cards. Many people turn to debt consolidation loans to make those payments easier to deal with. These loans allow borrowers to combine all their debts into one monthly payment with a lower interest rate. Here, clients will learn about different debt consolidation loan types.
Home Equity Loans
Home equity loans are backed by the homeowner’s equity in the home. In most cases, a borrower must have substantial equity and a high credit score to qualify. While interest rates are lower than with other loan types, the disadvantage is that the home is now at risk of foreclosure. Because of the increased risk, it’s usually not a good idea to use a home equity loan to consolidate debt.
With credit card balance transfers, the borrower moves their card balances onto one card, preferably with a lower interest rate. These rates are typically promotional in nature, and most expire after about six months. If a borrower takes this route, it’s important that they know when the promotional rate expires and the regular rate takes effect. When using balance transfers to consolidate debt, a borrower must have a card with a high enough limit to accommodate all their other debts.
A personal loan may be used to consolidate debt if the borrower can get one big enough to cover all their balances. Personal loans are unsecured, and their payments are fixed. Depending on the borrower’s credit score, they may find it hard to gain approval for a personal loan. While personal loans allow the combination of balances, they don’t always help borrowers save money in the long term.
These payoff loans are typically offered by credit unions and banks for the purposes of debt consolidation. They vary widely, and it’s important for a borrower to choose wisely. Debt consolidation loans often come with low interest rates but, in many cases, the payment term is extended as a result.
Selecting the Right Loan Type
Borrowers should know that, with any sort of consolidation loan, they’re not really eliminating their debts. Rather, the debt is shuffled around and payment is made easier. After repaying such a loan, it’s crucial to use one’s judgment in accruing additional debt.