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The Four Different Types of Debt Consolidation Loans

Personal_Finance / Debt & Loans Sep 03, 2018 - 01:01 PM GMT

By: Dylan_Moran

Personal_Finance It can be tough to pay off your debts, and the problem is only exacerbated if you have to pay off debt from a range of credit cards, loans, and other kinds of debts. Most people who find themselves in bad debt consider taking on a debt consolidation loan to solve their problems.

A debt consolidation loan is basically a large loan that combines all your different debts into a single loan that is generally offered at a lower interest rates. These kinds of loans are particularly valuable to those with high interest rates. Combining all of your outstanding debts like this makes it easier to manage your monthly repayments and other bills. There are several different kinds of debt consolidation loans out there. The following are the main four types.


1. Home Equity

A home equity loan is taken out with the equity in your home used for collateral. Generally, these loans are offered to people with a high equity in their home and with a good credit rating. While home equity loans generally come with lower interest rates, they come with a big drawback; it’s your home on the line here. If you are unable to afford the repayments on the loan, you risk your home becoming foreclosed. This is why home equity loans are not often used as debt consolidation loans.

2. Credit Card Balance Transfers

A credit card balance transfer allows you to transfer the balances from your credit cards into a single credit card; one with a low interest rate. A low balance transfer interest rate will generally be offered as a promotional rate that changes within six months. If you’re looking to transfer your balances, be sure you understand when this low rate will expire and you will be paying off the remaining amount at the regular interest rate. If you’re looking to use a credit card balance transfer as your debt consolidation loan, you will have to get a credit card with a high enough credit limit to house all of your current debt.

3. Personal Debt Consolidation Loans

A personal loan could possibly be used as a way to consolidate your debts, should you be able to secure a loan large enough to cover all of your outstanding balances. Personal loans are unsecured loans with fixed payments for a fixed amount of time. After being approved for your personal loan, you can then use the money to pay off – and consolidate – your other debts.

Depending on how healthy your credit rating is, you may run into some trouble getting approved for personal loans. If you’ve got a bad credit rating, a lender may be willing to take you on for a higher interest rate. They may also just outright reject your loan application. Taking on a personal loan at a high interest rate may allow you to consolidate your other debts, but it could leave you paying out more in the long-term. So it wouldn’t be worth taking on such a loan.

4. Debt Consolidation Loans

Plain debt consolidation loans are another option. These are loans that are offered by banks and credit unions with the express purpose of consolidating debts into a single loan. Different loans can vary, so be sure to shop around, check the fine print, and choose the best one for you. An ideal debt consolidation loan is one with a lower interest rate than what you are already paying out. Keep in mind that sometimes a bank will be able to offer lower monthly repayments by increasing the repayment period. That means that you are paying the loan off for longer, and may pay of more money in interest by the end of the term.

Choosing the Right Loan Type

It’s important to keep in mind that, no matter what kind of debt consolidation loan you choose, you aren’t getting rid of debt. Rather, you’ll be moving it around and making it easier to pay off. You may feel like you’ve got less debt now and will be tempted to borrow a little more. Practice discipline and don’t borrow anything else until you pay off the debt consolidation loan. Be sure to practice good judgement when taking on a new debt even then. You don’t want to find yourself back in this situation.

By Dylan M.

© 2018 Copyright Dylan M. - All Rights Reserved Disclaimer: This is a Paid Advertorial. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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