Using a debt consolidation loan to get out of your multiple credit accounts can be a smart move. However, you need to make sure that you choose the right option. There are four different types that you can choose from and you need to be careful when making your choice.
Some people will concentrate on choosing the option that will help them save money. This is the logical thing to do. However, you also have to consider what your finances can afford. Most of the time, the option that will help you save money will require you to pay a higher amount each month. If you do not want that, then you need to think carefully about your financial goals to help you make the right decision.
The best way to avoid mistakes is to get to know the four debt consolidation loan options.
What are the four types of debt consolidation loan?
These are your options when you want to use debt consolidation loan for your debts.
Debt consolidation loan. This is an unsecured loan that you can borrow to specifically consolidate your multiple debts. The truth is, most people think that this is all there is to it when it comes to consolidating debts through a loan. That is not true. There are other options. However, this is the only one that will guarantee that your other credit accounts will be paid. Once the loan is approved, the lender will take charge of paying off your other debts. The money will not even pass through your hands. To get a low interest rate, you need to have a good credit score. If you want a lower monthly payment, you need to stretch your balance over a longer repayment period.
Personal loan. This is another unsecured loan that you can borrow. Unlike debt consolidation loan, this is something that you can use on something else. For instance, if you want to consolidate debt that is worth $10,000, you can borrow $15,000 and use the other $5,000 on something else. The lender will not question how you will use it as long as you can qualify for the loan. To get a low interest on this loan, you need to have a good credit score. Once you are approved of the loan, the amount will be given to you and it is up to you to consolidate all your original debts. You need to discipline yourself to use the loan as intended and not on unnecessary expenses.
Home equity loan. This is the only secured loan that you use to consolidate debt. If you own sufficient equity in your home, you can use that to consolidate your multiple credit accounts. That means your home will be used as a collateral. Because of that security, you are guaranteed to have a low-interest rate on this loan. However, you will not get the lowest available rate unless you have a good credit score. It is important to borrow only what you need so you will not endanger your home. Remember that if you fail to pay this off, you could end up losing your house.
Balance transfer. This option involves taking your multiple debts and putting all the balance into this new card. In essence, this is not really a loan. However, the new creditor of the balance transfer card will pay off your multiple debts to complete the consolidation. In effect, you will owe the creditor. That makes it similar to borrowing a loan to pay off your multiple debts. When you are looking for a balance transfer card, it is important for you to get a 0% interest rate in the introductory period. For the first few months of the card, you will not be imposed with an interest fee. Anything that you pay towards the card will go to your principal balance. This is a great way for you to aggressively pay off your debts.
All of these options can help you get out of debt. But let us go into each option a little further so you can make a smart decision about the debt consolidation loan you will use.
What questions will help you choose a debt consolidation loan?
Debt consolidation loan is a great option but there are a couple of questions that you need to ask yourself before you finalize your decision.
What is the interest rate? This is not the only thing that you need to look into but it would be a big factor in your choice. The rule is quite simple. The loan should always be lower than the average of the debts that you want to consolidate.
Do you qualify? The next question to ask is your qualification. The requirements are the same as the other loans. You need to have a good credit score. You should have a stable income to prove that you can pay back the loan. You need to be of legal age and a citizen or resident of the country. Make sure you qualify before you think about consolidating your debts. You should also look at your debts. Are you allowed to consolidate them?
How much will you borrow? This is an important consideration. It is very important to borrow only what is needed. Borrowing more will only increase your debts. So stick to the plan and keep the loan as low as possible.
How long will you pay off the debt? A long payment term will give you a lower monthly payment. However, you will pay more in the long run – even with a lower interest rate. If you really want to save money, you should consider a shorter payment term but with a bigger monthly amount.
Do you know how to pay it off? Do not borrow unless you know how you intend to pay it off. Do not think about repayment after the loan approval. That would be too late already. Make sure you have a draft of the repayment plan and it should be aligned with your budget plan. This is how you prepare your finances to pay for the new loan.
Who is the lender? Know the signs of a scammer – especially if you plan to borrow from an online company. Conduct thorough due diligence to ensure that you will not be a victim. Look at their accreditations, affiliations and customer reviews. If they ask you for upfront payments or something does not feel right, trust your gut instinct and do not proceed.
Are you sure you want another loan? There are other ways to consolidate debt. You can use debt management where a credit counselor can help you pay off your debts. You will create a debt management plan and through that, you will send a single monthly payment to the credit counselor. He or she will be in charge of disbursing the money towards your various creditors and lenders. You can also look into debt settlement. This will help you reduce your balance by negotiating with your creditors and lenders. You can do this on your own or with the help of a professional. In case you want to get the help of a debt expert, call number #1 debt consolidation loan company, National Debt Relief. The initial consultation is free so you may want to take advantage of the opportunity to talk to a debt expert.
What happens when you use a personal loan as a debt consolidation loan?
A personal loan is another option to get an unsecured debt for consolidation purposes. The great thing about this is you have the freedom to use it other than consolidating. However, if you have no self-control or discipline, then this could end up being your downfall. Remember that the loan will be given to you. It will be your responsibility to pay off your multiple creditors. If you fail to do this and end up using the money on something unnecessary, then you only succeeded in growing your debts.
Here are the important things you need to remember about a personal loan.
- Borrow only if you are sure you will get a low-interest rate. Just like with a debt consolidation loan, you should aim for a lower rate. This is easier to accomplish if you have a good credit score.
- Include the monthly payments in your budget plan. This will guarantee that you your monthly payments will have a fund. Treat it like a bill so you will be forced to pay it off.
- Choose a lender that offers the lowest fees. There are a lot of fees involved in borrowing a personal loan. The origination, underwriting and application fees are only a few of them. Make sure you choose a lender that offers the lowest fees so you do can minimize the expense that you have to pay.
- Check the charges. There are late penalty charges and prepayment penalties to consider. Some lenders have very low fees but will charge high penalties. See what is more appropriate based on your specific debt and financial situation. You should also look into your personality. If you can pay your dues well, you do not have to worry about this.
- Do not assume that you will get the lowest rate. Some people are attracted by the interest rate range that is advertised by the lender. Do not assume that this will be the rate that you will get. It will still depend on your qualifications and credit report.
- Compare rates and lenders. Always compare between different lenders. Look at debt consolidation reviews so you will know the best personal loans that can be used to consolidate debts. These reviews will give you the essential information that will help you make a smart decision about your debt solution.
Should you consolidate your unsecured debts under a secured debt consolidation loan?
Some financial experts will say that you should never consolidate unsecured debts under a secured debt. In a way, they have a point. Putting your home on the line because of your reckless credit card use does not seem like a smart move.
However, if you are sure that you have learned your lesson and you are determined to get out of debt, then this option could work for you. But we need to stress the importance of changing your habits first. You have to exert some self-control so you will no longer land in the same situation. Otherwise, you might acquire more debt and end up losing your house to foreclosure.
So before you decide to use a Home Equity Loan, make sure that you understand what is at stake. The equity of your home is yours and it is logical to want to use that to help you get out of high-interest rate debts. However, this is also an asset that you can use on something else – like your retirement. Do not use it recklessly for consolidation especially if you know that you have not yet changed the bad financial habits that got you into debt in the first place.
Remember these two things:
Identify what led you to acquire multiple debts. Start by looking at the cause of your debts. Was it irresponsible spending? Or was it a series of unfortunate events that you failed to prepare for? If it was the former, you need to get rid of the habits that made you spend beyond your income capabilities. If the lack of an emergency fund is the culprit, then you know that you have to build up your reserve fund to avoid landing into another debt pit.
Have a repayment plan in place. Do not put your house in the line if you know that you have no idea how to pay it back. There are other options like debt settlement that will help you reduce your balance. But if you put your home in the line, you will not get a chance at this reduction. You will lose your home. So study your finances carefully and make sure you can afford to pay back the Home Equity Loan.
What are the dangers of a balance transfer as a debt consolidation loan?
If you want to use balance transfer to consolidate your debts, you need to have a strategy in mind. This is not something that you go into without a plan. You see, a balance transfer offers a 0% interest rate during the introductory period. You should aggressively pay off your debt during this time because every amount will go to your principal balance. After the introductory period, the card will have a higher interest rate and it might make it hard to completely pay off your debts.
A balance transfer requires an aggressive repayment plan because if you fail, you might be vulnerable to a couple of dangers.
- You might think your debt is okay. It is not. You just transferred it. The debt that you owe is still the same.
- You might be left with a higher interest rate. If you fail to completely pay off your balance before the introductory period ends, you might end up spending more because of the higher interest rate. If you are certain that you can pay off your balance within 6 months, then go ahead and opt for balance transfer.
- You might be tempted to use the credit card. A balance transfer card is still a purchase tool that you can use. While there is no rule prohibiting you from using it for purchases, it will be imposed with a high-interest rate. The 0% rate is only for the transferred balance. It will not include new purchases you make with the card.
- You might be tempted to use your other cards. In case the balance that you transferred were from other credit cards, their 0 balance might tempt you to use them again. Do not give in to the false sense of debt freedom. You still have a lot to pay off. Stop using your cards for now.
There are other dangers when it comes to balance transfer. Make sure that you know what you can getting yourself and stay committed to your repayment plan.
What should you do after getting the debt consolidation loan?
Once you have completed the debt consolidation loan, you need to realize that your journey has just begun. You still have a long way to go and your repayment is far from over. Make sure you stick to your debt relief goals so you can completely pay off your debts.
Here are three important things that you need to do after consolidating your debts with a loan.
- Keep paying your original debts. It is very important to keep paying your current debts until you receive an official and written confirmation that the original debts had been paid off. You might stop paying them prematurely and end up with a small balance. This balance could grow unnoticed over time.
- Stop using credit. At least, stop yourself for the next few months. You want to maximize the extra amount that you have to pay off your debts. Be aggressive in your payments for a couple of months. It is actually encouraged to stop using debt until you have completely paid off your debt consolidation loan.
- Change your financial habits. Obviously, something was wrong with how you managed your finances. You wouldn’t be in debt if you did a great job at it. Identify what the problem was so you can eliminate the bad habit that led you into debt. That is the only way that you can really be free from falling into another debt pit.
While debt consolidation loan is an effective and legal way to get out of debt, you have to remember that it takes commitment and discipline to completely pay off your balance. Be smart about your financial decisions and try to change your habits so you can make better financial choices.