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The Truth About Low-Interest Consolidation Loans

Man with options | Alternatives to Bankruptcy

Updated: Jun 3, 2014

Highlights

  • Review your options for consolidating your debt.
  • Most unsecured consolidation loans in today's market require strong credit.
  • Consider using your home equity to consolidate debt.
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Learn the Four Types of Low-Interest Consolidation Loans

Credit card debt can pile up. For some of us, it can quickly reach an unmanageable point. If the amount you charge on your cards is more than you are paying, your balances can become enormous before you know it. If your cards carry high interest, too, it can be extremely hard to dig yourself of out the hole.

Your best chance for getting out of debt is to make an aggressive plan and stick to it.

Searching for Low-Interest Bill Consolidation Loan Rates

One way to work the problem is to to find a way to keep your interest rates low, in order to keep your monthly payments low. Unfortunately, if your debt level keeps rising or if you miss a single payment, it will be very hard to find a low interest bill consolidation loan.

Debt Consolidation Loans

One solution to managing out-of-control credit cards and other debts is through low-interest bill consolidation loans. If you qualify, you can use a low-interest bill consolidation loan to pay off high interest credit cards or other loans. Depending on how much debt you have and the size of the debt consolidation loan you qualify for, you may need only one loan to consolidate all your debt.

However, a low interest debt consolidation loan can only do so much. It doesn't reduce your debt. It merely resets your interest rate so you can start pay it off faster. To get out of debt, you need to establish a plan of attack. Before you consolidate your debt in a bill consolidation loan you need to:

  • Make a budget, so you can control your cash flow and avoid running up more debt
  • Pay your monthly bill consolidation loan payments in full and on time
  • Limit excess spending

Four Types of Low-Interest Bill Consolidation Loans

1. Secured Consolidation Loan

A secured bill consolidation loan is one where you provide collateral for the loan. Collateral is anything the lender can redeem if you default on your payments, such as a home, vehicle, or in the case of a business, inventory or equipment.

With collateral, you are more likely to get low interest bill consolidation loans because you are putting up something the lender can repossess, in case you do get behind on your payments.

2. Unsecured Consolidation Loan

An unsecured bill consolidation loan is one where you provide no collateral. This often results in a higher interest rate. With an unsecured loan, lenders tend to limit the size of the loan, to limit their risk. Banks and Credit Unions make unsecured loans between $1,000 and $100,000. Peer-to-peer lenders lend up to $35,000. Most unsecured loans require strong credit.are difficult to obtain in today's market, requiring strong income and credit.

Quick tip

If your credit isn't excellent, but is improving, see if you qualify for an unsecured personal loan from Freedom Plus.

If you can find an unsecured loan with a lower rate than your current debts, it can be an effective way to improve your financial situation. At times, it makes sense to take an unsecured loan even at a high rate. If you lower your monthly payment to a level you can afford, the benefit of the lower monthly payment could outweigh the high interest rate, particularly if it prevents you from defaulting on your payments.

Be sure to shop around to find the best loan available.

Another type of unsecured loan option to consider, if your credit is good, is a balance transfer offer. Balance transfers come with a low “teaser” rate that expires. Make sure you know when your rate adjusts and how high it can go and never miss a payment on a card you have used to transfer balances to, or you will find all your debt on the card at a penalty interest rate that can exceed 29.99%.

3. Home Refinance Loan

If you own a home, consider a cash-out refinance loan to get a lower interest rate mortgage AND pay off existing debt. Depending on how much debt you consolidate, this might increase your mortgage payments, though it could lower your monthly costs for your mortgage and debt combined.

Adding to your mortgage balance puts your home at greater risk. If you don't make your new, higher payment, you risk foreclosure. Many Americans still owe more on their homes than they are worth. Others have recovered some equity but not necessarily enough to do a cash-out refinance loan.

Quick tip

#2: When you are ready to shop for a mortgage, get a mortgage quote from a Bills.com mortgage provider.

4. Home Equity Line of Credit (HELOC)

If you are a homeowner with some equity in your property, a home equity line of credit (HELOC) might be the right solution to consolidate your bills. However, this can also put your home in danger. In order to figure out if a HELOC is a good way to consolidate debt, start by figuring out how much equity you have in your home. Subtract your remaining mortgage balance from the current market value of your home. Keep in mind that the maximum combined loan-to-value (CLTV) for your first and second mortgages is 80-85%, in most markets.

If you look for low-interest bill consolidation loans, weigh all your options carefully. Learn about each option and then figure out which works best for you.

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10 Comments

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  • LH
    Oct, 2011
    Lyle
    We have $10,000 (with a rate of 4.5% until paid off) in credit card debt and We owe $12,000 (with a rate of 7.8%) on my car. We have great credit (over 800) is it worth it to try to consolidate these bills into one? With the housing market the way it is we owe more on the house than it is worth, so we can not get a home equity loan or refinance it. We sometimes get a little short on cash. Where is the best place to get a loan if you think it would be better to consolidate?
    0 Votes

    • BA
      Nov, 2011
      Bill
      As you have excellent credit, I recommend looking for low interest or 0% interest balance transfer offers. The 4.5% is a pretty low rate, so only transfer a balance as large as $10,000 to a 0% if you are confident that you can pay off the debt within the time that the low-interest rate stays in effect. If the rate rises significantly after the teaser period, you could be better off staying put at the fixed-rate 4.5% you have.

      You can look into refinancing your car loan. Credit unions often have excellent rates for auto loans, so start your shopping there.

      Lastly, look into a HARP refinance for your mortgage. You won't be able to take cash out, but you could lower your monthly payment and improve you cash flow, easing the strain to pay your other bills.
      0 Votes

  • CF
    Apr, 2011
    charles
    I have about 40,000 in credit card debt due to unemployment over the past year. I am employed now, but banks are unwilling to offer any consolidation loans, even a home equity. I always pay my bills, I just want to consolidate 4 credit cards. I don't know how to bring down essentially old debt if I can't get a consolidation loan
    0 Votes

    • BA
      Apr, 2011
      Bill
      There is no one-size-fits-all answer to your question. See the Bills.com resource What are my debt resolution options? to understand the different approaches to solving a debt problem that is causing distress.
      0 Votes

  • SW
    Feb, 2011
    sajila
    Hi Such a Nice Post.
    0 Votes

    • JM
      May, 2011
      joyce
      I need to know how to get my bills consolidated.
      0 Votes

    • BA
      May, 2011
      Bill
      I have two suggestions for you:
      1. Enter your data into the Bills.com Debt Coach for a personalized, interactive review of your debt resolution options. This will help you choose the debt resolution strategy that is right for your unique circumstances and goals.
      2. Complete the Bills.com Savings Center form to receive a no-cost, no-gimmick quote from a pre-screened debt resolution provider.

      Let us know how you decide to resolve your debt issue.

      0 Votes

  • NK
    Nov, 2010
    Nick
    Is a bill consolidation loan preferred over a low interest balance transfer offer?
    3 Votes

    • BA
      Nov, 2010
      Bill
      Low interest loans are preferred because low interest balance transfers often are only introductory rates for short periods of time. Also if a payment is late/missed on an introductory rate often the interest rate will balloon to a much higher rate.
      0 Votes

    • FT
      Sep, 2011
      Fredric
      If the loan is up side down to the housing drop then who do you think is going to give you a chance , which is not your fault.
      0 Votes