Debts are inevitable, but they can lead to a financial crisis when mismanaged. Most United States (US) households are currently choked in debt thanks to the widespread use of credit cards.
Most citizens, on average, have debts accumulating to more than $90,000 from various sources. Getting yourself out of debt can be challenging due to the high interest charged on your loans if you are in such a situation.
However, if you want to refinance your credit card debt, there is a way out. You can apply for a debt consolidation loan, then cumulate your small loans into one and pay it in bulk.
What are Debt Consolidation Loans?
Debt consolidation refers to accumulating your debts and then taking a new loan with favorable terms to clear off the small debts. These debts could be from your credit cards, student loans, and other liabilities.
This type of loan usually has a lower interest rate than your additional credit cards. It requires that you only make one single monthly payment instead of multiple payments with multiple debt sources.
You will make such payments until you clear off that loan without worrying about accumulating interests from numerous financiers.
How to Apply for Debt Consolidation Loan
Applying for a debt consolidation loan is easy. You can apply through your bank or Credit Card Company. You will get the loan processed faster if you have a positive payment history. Make sure you improve your repayment history before applying for the loan. Most creditors are more than willing to cumulate small debts into one since it makes their work easier and cheaper to collect their money from you. Other specialized consolidation companies can give you such loans if you fail to secure them from your bank.
Types of Debt Consolidation Loans
There are two main types of debt consolidation loans. These are secured and unsecured loans.
Secured loans are those that place security or collateral to back up your loan. The collateral can be your house, car, or other valuable assets. Unsecured loans are those that do not require collateral. Secured loans are easier to obtain and have lower interest rates as compared to unsecured ones.
Both of these loans attract a lower interest than your credit card rates and monthly payments.
The interest rate is fixed, so you never expect surprises or hidden fees when clearing your debt. That means you get to clear your debt faster by paying less. You need to have a good credit history to secure either of these loans.
Keep in mind that the lender can claim the asset you put as collateral for secured loans if you fail to fulfill the end of your bargain. If you are not willing to risk your assets, you should try to get an unsecured loan as much as possible.
Different Ways of Consolidating Your Loans
While the main idea remains the same, there are different ways to lump up your multiple debts into one loan. Some of these methods include:
HELOCs – HELOs, also referred to as Home Equity Lines of Credit or home equity loans are one way of debt consolidation. These loans are available to people who own homes. Your home helps you build equity over time as you pay your mortgage.
Equity is the difference between the value of your home and the balance you have on your mortgage. Loans acquired using this equity have attractive interest rates. You can get more money for much lower interest rates.
The money comes as lump sum cash that you can use to clear your debts and remain servicing just one loan.
Credit Cards – You can consolidate all your credit card loans into one new credit card. Make sure to check the interest rate of the new card and the cumulative amount you would have to pay when servicing that one loan.
If the interest payments are lower and the total amount of overtime is reduced, then you can opt for that one card. It will be easier to service it considering that interest rates are, in most cases, fixed.
Student Loans – As a student, you can take advantage of student loans from the Federal government through the Federal Direct Loan Program. This loan helps pull together your debts to enable you to clear your loan faster.
Loan consolidation works to help you get out of debt faster. However, you must make sure you negotiate for lower interest rates and avoid getting into more debt.