Debt consolidation loans are used as a tool to pay off debt rapidly and save money. By combining multiple credit card balances into one loan borrowers receive lower interest rates and more manageable monthly payments.
People begin to seek out help when just making their minimum monthly payments becomes too much to handle.
Consolidating debt is the first step towards a bright financial future. Unfortunately many consumers wait until it’s too late to ask for help.
There are a few guidelines to follow when using a consolidation loan to lower credit card balances. In our guide we review the fundamentals and give insights into making paying off credit card debt easy. On the market today are many options for consolidating your debt. Ranging from unsecured personal loans to home equity loans we uncover the best solution for consumers struggling with debt problems.
Review our guide before applying for consolidation loans:
- Using Consolidation Loans to Eliminate Credit Card Debt
- Benefits of Debt Consolidation
- Popular Types of Debt Consolidation Loans
- Getting Approved for Debt Consolidation
Using Debt Consolidation Loans to Eliminate Credit Card Debt
Reducing credit card debt is a long and difficult process without some help. Many consumers turn to debt relief agencies to help them manage a monthly budget and pay off their debt. For consumers that prefer to manage their finances alone debt consolidation loans are a perfect solution for the do-it-yourself financial planner.
The way consolidation loans work is by paying off all outstanding debts with a new loan. Any credit card balances will be paid off in one lump sum to stop interest charges and late payment fees. Now the borrower will make just one monthly payment to their lender instead of paying multiple credit card bills.
A few popular financial planners are eager to discourage consumers from taking out debt consolidation loans. While their argument may be valid in certain situations, they fail to see the larger problem most consumers face: getting out of debt completely.
These personal finance guru’s believe that debt consolidation will leave consumers with the opportunity to increase their credit card debt if unsupervised. This can be a dangerous situation for consumers with poor financial skills or a lack of willpower. Although there are risks involved with taking out debt consolidation loans the benefits far outweigh these potential downfalls.
Looking for an alternative way to pay off debt without taking out another loan? Consider reading our overview on the Debt Snowball Plan.
Benefits of Debt Consolidation Loans
Consolidation loans provide a few important benefits for consumers with credit card debt. The primary advantage of credit card consolidation is a reduced interest rate. By combining high interest credit card balances into one low interest personal loan borrowers can save possibly thousands of dollars in fees. Lower interest rates are directly reflected as more affordable monthly payments. This is a huge advantage for borrowers that are having a difficult time paying their credit card bills.
A consolidation loan can be structured to extend the repayment period of the debt. Some financial experts discourage consumers from extending their credit card debt over 15 or even 30 years. While it is generally frowned upon, the extended repayment terms can help consumers save money and prevent them from defaulting on their debt.
Consumers agree that debt consolidation helps remove the stress that comes with credit card debt. By consolidating their outstanding balances consumers have only one bill to pay each month instead of multiple credit cards. Another benefit is that this payment can be automated with a bill pay system provided by most banks.
Advantages of using consolidation loans to pay off debt:
- Competitive Interest Rates
- Affordable Monthly Payments
- Longer Repayment Period
- Only One Monthly Bill to Pay
- Increased Financial Flexibility
Popular Types of Debt Consolidation Loans
Consolidation loans are available from a variety of lenders. Some of the most common options include unsecured personal loans, home equity loans or credit card balance transfers. Consumers must carefully review their financial situation before choosing which debt consolidation loans offer the most benefits.
Unsecured Personal Loans
Unsecured personal loans are frequently used for debt consolidation because they are easy to qualify for and have low interest rates. The main advantage of unsecured loans is that they require no collateral to guarantee the loan. This is an advantage for borrowers that have limited cash available but need to get approved for a personal line of credit.
Peer to peer lending is an emerging player in the debt consolidation loan market.
Using new technology peer to peer lending sites connect borrowers looking for a loan to individual investors. Loans can get funded with as little as $25 by investors making it a very low risk investment.
Borrowers can get loans ranging from $2,000 up to $35,000 for debt consolidation.
Home Equity Line of Credit
Consumers that own a home and have a substantial amount of equity built up may consider a home equity line of credit to fund the debt consolidation process. Typically home equity loans have very low interest rates compared to credit cards or consumer loans. Most mortgage lenders offer special rates for borrowers that have their first mortgage with them as well.
It should be noted that many personal finance experts discourage borrowers from using home equity to guarantee debt consolidation loans.
The reason is simple: home equity loans will convert unsecured debt into secured debt. This means that in the event a borrower cannot repay the loan, lenders will foreclose on the house to collect the remaining balance. In contrast, unsecured personal loans can be eliminated after bankruptcy and are not required to be repaid.
Financial hardships never come at an appropriate time. If a borrower loses his or her job after taking out a home equity loan to consolidate debt their financial situation could get much worse. This should be carefully considered before using home equity for debt consolidation loans.
Credit Card Balance Transfer
A final option for consumers that do not qualify for traditional consolidation loans is taking advantage of credit card balance transfers. Now that the consumer credit market has become saturated there are many opportunities for borrowers to find low interest credit cards. In fact, there are many companies offering zero percent interest on balance transfers for an introductory period.
Borrowers that believe they will be able to pay off their debt aggressively may find credit card balance transfers to be extremely rewarding. Not only can they consolidate debt but they can take advantage of paying off debt without the burden of interest charges for the first 6 or 12 months.
As we covered there are many options for consumers looking for debt consolidation alternatives. Although debt consolidation services are frequently looked down upon by the “financial experts” there are thousands of case studies where consumers have used this system to pay off their debt completely. Each situation will require special attention and advice regarding whether consolidation loans are a smart choice.
We encourage any borrowers considering debt consolidation alternatives to discuss their plans with a financial advisor before starting the process.