Loan Consolidation

Highlights

  • Understand how a consolidation loan can help you accomplish your financial goals.
  • Review the different types of loan consolidation products available.
  • Improve your credit score, if a low credit score causes you to get turned down for a consolidation loan.
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Information on Various Types of Loan Consolidation

if you are like most americans, you have some kind of debt you pay interest on each month. it may be interest you pay on your mortgage payment, for a car purchase, for a student loan you took out for yourself or for your child, or it may be for debt that you have on a credit card.

if you stop and analyze what it costs you to borrow the money, you realize that it is the interest that inflates the debt beyond the original money you borrowed. that is not avoidable, most of the time, as there are few places you can go and borrow money with no interest or loan fees.

your goal as an educated consumer should be to pay as little interest as you can, to service the debts you have. you want to get the lowest lifetime cost of repaying the debt and the loan, including the interest and fees. sometimes the best way not to pay interest is related to your spending habits. if you don’t buy a good or service on credit, you will not pay any interest. establishing and living within a reasonable budget will help you save money and pay down any debt you have more rapidly.

loan consolidation goals

for debts that you already have, you should look into taking out a consolidation loan. there is a small convenience to paying fewer bills, once you have consolidated them. the big benefit, however, is that when you lower your interest rates, you can accomplish the goal of speeding up the time it takes to pay off your debt.

at certain times in life, you may not be looking to get out of debt as fast as you can. your goal may be to lower your monthly payments, so you can more easily afford to pay your debts. some consolidation loans can help you accomplish this. look for a consolidation loan that stretches your repayment term. this lowers your monthly bills, but will cause you to pay more in interest over the life of the loan. if you take this kind of consolidation loan, try to accelerate your payments whenever possible. if your income grows, pay more each month to avoid paying additional interest.

consolidation loan programs

there are different types of debt consolidation loans and programs available. which option is right for you depends on different factors. important factors include the kind of debt you have, your credit rating, whether you own a home with equity, your income, and your goals.

unsecured or non-real estate debt consolidation loans

one loan consolidation option is to seek an unsecured loan from your bank or a local credit union. qualifying for an unsecured loan generally requires excellent credit and a strong debt to income ratio. since the credit crunch began, interest rates on unsecured loans have risen and the loan amounts have dropped, as lenders seek to limit their exposure.  if you are turned down when you apply for a loan, find out why. if it is related to your credit score, take a look at your credit report.  you can take steps to improve your credit score and qualify later.

some loans are secured against your assets, such as your car. the interest rate for this kind of loan is usually slightly higher than a home loan, but it is certainly less than you pay on most credit cards. look for a loan with no prepayment penalty, so you can pay it off faster as your financial situation improves.

home equity consolidation loan

if you are a homeowner, another debt consolidation loan option is to borrow from the equity in your home by taking out a second mortgage. if you own a home and have significant equity, well more than a 20% equity stake, as well as good credit, you can apply for a home equity loan (hel) or a heloc (home equity line of credit).  you should compare a home equity loan to a heloc. in most cases, the interest on your equity loan is tax-deductible, which will save you more money. you can use the money you borrow to pay off your high interest debts. 

any time that you use your home equity to consolidate debt, make sure you understand the risk of turning unsecured debt into secured debt. if you miss a credit card payment, you can suffer the financial harm of late fees and a hike in your interest rate, but if you miss a mortgage payment, you put your home at risk.

cash-out refi consolidation

it may make sense for you to refinance your primary mortgage, taking  cash-out to consolidate debt. some lenders will require a strong credit rating, but not every lender.  for instance, an fha refinance loan can help borrow at low interest without having impeccable credit. also, an fha cash-out refinance loan will allow you to borrow a greater percentage of your equity than either a home equity loan or standard cash-out refinance loan. you have to meet fha qualifying rules regarding your debt-to-income ratio, in order to get the fha loan, but there is no better consolidation option for you if your credit rating is fair to good.

just as with a second mortgage, be careful of turning unsecured debt into secured debt in a cash-out refinance.

balance transfer

another option for you to consider is a balance transfer offer from a credit card company. if you have a chance to transfer high interest balances to a low interest rate card, you can save money and pay your debt off faster. while balance transfer offers are less frequent than a few years ago, they still exist. credit card companies, like other lenders, will examine your credit rating. you need to have a good credit rating to qualify for a balance transfer. even if you qualify for a balance transfer, use the offer carefully. balance transfer offers may come with a very low teaser rate, but make sure to note how long the low rate stays in effect, how high it can adjust, and what is the maximum rate you could end up paying in case you miss a payment.

student loan consolidation

if you have student loan debt, it may be eligible for consolidation. there are special student loan consolidation program. federal student loans are much easier to consolidate than private student loans. federal student loans need to be consolidated through the US Dept. of Education. if you have federal stafford, plus, or perkins loans, you may be able to consolidate them together. private student loans may be eligible for consolidation, but not all lenders agree to become part of a consolidation. in most cases, it’s not possible to combine federal and private student loans due to the differences between loan terms. qualifying for a private student loan consolidation is like qualifying for an unsecured loan, which has become very difficult in the past few years.

in some cases, a student loan consolidation extends the  payment term of your original loans, so you may actually pay more in interest over the life of the loan. if possible, try to accelerate your payments as your income grows to avoid paying additional interest. however, any discounts you receive for consolidating student loans will reduce the total interest you pay over the life of the loan.

summary

consolidating your debt can be a smart financial decision. it can help you get out of debt faster or it can help you more easily manage your debt load.

use the articles and information on bills.com to educate yourself about debt consolidation loans. we can help you find the best rate on a debt consolidation loan and provide you with ways to consolidate, such as a refinance loan, a home equity loan , or a student loan consolidation.

if you find that your debt is not eligible for any consolidation program and it is getting to be more than you can handle, take the time to review all the options available that can help you more effectively deal with your debt.

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