Debt Consolidation Loans are personal loans used to combine high interest debt such as credit cards, payday loans or other promissory notes into a brand new fixed rate loan. After you receive the funds for this loan, they are used to pay off other debts… If you pay off your loan on time, provide a lower interest rate, and don’t take on extra debt that you can’t handle, you can pay off your debt faster and save tons of money in interest.
However, while using these loans is a good way to consolidate payments and hopefully lower the interest rate on your debt, there are several debt consolidation loan alternatives for people who cannot qualify for a debt consolidation loan or those looking for minimum interest rates. … …
Debt Consolidation Loan Alternatives
A debt consolidation loan is not for everyone. Since debt consolidation loans are unsecured loans for individuals, lenders may have stricter eligibility requirements or the loan may not be large enough for the types of debt you are trying to consolidate. Several alternative debt consolidation loan options include:
- Credit card for balance transfer: BUT balance of transfer card allows you to transfer debt from other credit cards – usually only credit cards from other companies – or use the balance transfer check to combine other forms of debt with a 0% interest rate. This low advertising rate period typically lasts 12 to 21 months and requires a good to excellent credit rating to be approved. At the end of the introductory period, you will be responsible for paying the card’s standard interest rate on the remaining balance. In addition, most cards charge a balance transfer fee on the total transfer amount, usually 2 to 5 percent.
- A loan secured by equity capital or HELOC: Loans secured by real estate as well as Home Equity Credit Lines (HELOCs) allow you to borrow against the security of your own capital. While a home equity loan has fixed monthly payments with a fixed interest rate, HELOC works like a credit card and has a variable interest rate. Both can be used to consolidate debt at high interest rates, but you risk losing your home if you can’t get it back. Plus, both require a certain amount of equity in your home. Compared to debt consolidation loans, home equity loans and HELOCs often have longer maturities, larger loan amounts and lower interest rates.
- Refinancing when cashing out: BUT cashing refinancing replaces the existing mortgage with a new one that exceeds the current outstanding balance. You can withdraw the difference between the two balances and use it to improve your home or consolidate debt. As with using a home equity loan or HELOC, you risk losing your home if you cannot pay off your new loan.
- Amortization: Amortization occurs when you agree with your creditor to pay less than the amount owed to pay off a debt. You can negotiate with the debtor yourself or pay a debt settlement company or lawyer’s fees to negotiate on your behalf. Even if you, a lawyer, or a company successfully negotiate a settlement, your credit score may suffer.
- Bankruptcy: Feed for bankruptcy includes going to federal court to pay off your debts or reorganizing them to give you time to pay them off. While you can pay off your medical debt, personal loans and credit card debt in the event of bankruptcy, paying off student loans and tax debt is incredibly difficult. Before choosing this alternative, keep in mind that your credit rating will be hit hard; it can take years to recover.
While using a debt consolidation loan to consolidate high interest debt may make financial sense, if you can secure a lower interest rate, it is not your only option. In some cases, choosing an alternative route may be the best choice. For example, you can get a lower rate by taking out a home equity loan as it is a secured loan secured by your home.
However, it is also important to know the risks of choosing such an alternative. Take a closer look at the different options and compare interest rates, repayment terms, and the trade-offs you make with each before proceeding.