It’s best to be sure that consolidating offers you the best benefit financially. Don’t just agree to it for the ease of having only one monthly payment. Consolidating can be a smart move, but it’s only beneficial if you stop using credit cards and accumulating more debt. A change in habits has to occur. Address your spending habits, start on a budget and work towards your financial goals. It’s important to have a plan to prevent running up debt again. If utilized correctly, debt consolidation can help take control of a bad debt situation and help make the changes needed to turn a person’s financial picture around.
There are two main types of consolidation loans- secured and unsecured. A secured loan requires some sort of collateral against it, such as a home or car. This type of loan opens up the possibility of losing your asset if you default on the loan. An unsecured loan doesn’t require collateral and is often seen by combining credit card balances or personal loans.
Personal Consolidation Loans
A Personal Consolidation Loan is unsecured and has a fixed payment over an agreed period of time. A loan large enough to cover all your balances is used to consolidate debt. The interest rate on these loans is dependent upon your credit history. If you have bad credit the interest rate is higher.
Balance Transfer Loans
Balance Transfer Loans take several credit card balances and combine them into one on another credit card account. Usually the credit card has no interest being charged or has a low interest rate. Be aware that those interest rates are usually temporary and are promotions that last for a short period of time– normally around 6-18 months. If you don’t pay the balance by the time the promotional period ends, any accumulated interest will be tacked on to your current balance. Also a high interest rate will now apply. Unless you’re able to pay off the entire balance before the promotional period ends, a Balance Transfer Loan is not a good direction to go when consolidating balances.
Home Equity Loans
A Home Equity Loan is one that’s taken out using the equity in your home. Equity is the market value of your house minus and outstanding mortgage debt. Good credit is required to qualify for this loan. The interest rate is typically lower, but your home is used as collateral, if you would happen to default on the loan.
Student Loan Consolidation
Student Loan Consolidation is beneficial because you can lock in a lower interest rate. You can also extend the life of the loan, which can lower the monthly payment. Although this will increase the amount of interest you pay in the long run, it may be worth having a more manageable payment.
If you consolidate federal student loans, do so through the federal government. Consolidating with a private company means you’ll forgo protections associated with federal loans and you’ll no longer be eligible for student loan forgiveness programs if ever needed.
Debt Consolidation Loans
Debt Consolidation Loans are offered by banks and credit unions. The main purpose is to combine your debts into one loan. These loans typically have a lower monthly payment and interest rate. The lower monthly payment occurs because the repayment period is extended. If you’re considering this type of loan, a Debt Management Program is your best option. It isn’t a loan, but it does consolidate multiple monthly credit card payments into one and lowers interest rates.