When you have built up a large amount of debt loans over a period of time on various credit cards, you might consider debt consolidation loans as the first step in your plan to get out of debt. After all, it is a real struggle to keep up with multiple creditors, multiple accounts, balances and interest rates.
Once you have determined that debt credit card debt consolidation is right for you, it is time to explore the options for debt consolidation. These options can vary depending upon your credit score, security and other personal factors.
Let’s take a brief look at your debt consolidation options.
Secured Debt Consolidation Loans
If you own your own home, and you have equity in your property, then you can take out a new mortgage or a second mortgage (these are called home equity loans) with a new lender consolidate debt at a low interest rate.
Even in today’s economy, the process is quick and straight forward. Howeve, beware that these loans are not instant loans. You will have to obtain an appraisal and arrange for a closing through a title company. At closing you get a check for the amount of money in excess of that needed to pay off the first mortgage. You then use the money to pay off the various creditors. Because the loan is secured with your residence or other real estate, the loan is called a secured loan. Therefore, the risk is great that you will lose your home if you do not make the monthly payments in a timely fashion.
Unsecured Debt Consolidation Loans
If secured loans are “secured” by property, then “unsecured” loans are secured by nothing more than your promise to repay the lender. So, basically the lender will loans you money without the means to repossess any property if you default on your payments. As a result, the interest rates and fees are higher on unsecured debt consolidation loan. This is to compensate the lender for the risk factor involved.
There are two basic types of unsecured debt consolidation loans. Let’s take a look at each.
Credit Card Balance Transfers. If you have a good credit score, you will be eligible for credit card balance transfer offers to consolidate other credit cards debts at a low (or even zero percent) interest rate. The major drawbacks to this type of transfer is that the low interest period is usually pretty short (6 to 12 months) and the transfers carry a balance transfer fee of 3% to 4%. If you cannot pay off the balance within the repayment period, you have to roll the balance over onto another card and pay another balance transfer fee. If you are unable to find another offer, you will be stuck with the regular interest rate on the card after the transfer period expires.
Bank Debt Consolidation Loan. Again, if you have good credit, you can apply to your local bank for a debt consolidation loan. The bank will typically charge a higher interest rate on the loan because it is not secured by property. But, the process will be straightforward and the term will be longer, thereby decreasing the monthly payments. You will not have to roll the loan over every six to twelve months either. So, this option, while carrying higher interest, is also more user friendly. These are cash loans so the bank will deposit the loan proceeds in your account and you will have to write a check to each creditor.
Bad Credit Loans For Debt Consolidation
If you have a bad credit score, you are going to have to explore the possibility of a bad credit loan for debt consolidation. Note that with the recent FICO 08 changes, occasional missed or late payments do not adversely affect your credit score as badly as they once did. However, defaults and bankruptcies still have the same effect.
Just as it is for bad credit personal loans, the interest rate and fees are much higher for loan consolidation if you have bad credit. If at all possible, post some sort of collateral to try to entice lenders to make consolidation loans at lower interest rates. If you must take out an unsecured debt consolidation loan, you need to carefully weigh the interest and other costs against the need to consolidate debt and act accordingly.
Beware Of Hidden Fees And Other Costs
There can be other costs involved in securing a debt loan to consolidate credit card debt. These include arrangement fees and redemption penalties on your existing credit agreements. Investigate these possibilities before you consolidate debt into a new loan. Also, look out for companies that advertise ‘no added fees’. Sometimes their interest rates are much higher.
The best way of finding a lender is to do your homework. Check out one of the many comparison sites on the internet to compare different debt consolidation companies.
After all, it costs nothing to shop around.