- 5 min read
- Review the types of loans to consolidate debt that are available.
- Examine how to find the best loan to consolidate debt.
- Don't consolidate debt loans without shopping around.
Figure Out if a Loan to Consolidate Debt Will Help You
Interest rates are at record lows. Now is good time to lower the costs of financing your debts by taking out a loan to consolidate debt. If you have some high interest credit card debt, one solution is to consolidate debt loans. You can lower your interest rates with a consolidation loan, and may be able to lower your monthly payment, too. Not only will you save money, but you will have fewer bills to pay, making it easier to manage your finances.
You won't end up saving money or improve your finances, if you consolidate debt loans and then run up more debt. A large number of people who've taken a consolidation loan run up their balances on the cards they just paid off. Instead of making things better, they end up with a larger mountain of debt.
If you are committed to being disciplined about your future spending loans to consolidate debt can be an effective tool.
What is a Loan to Consolidate Debt?
When you consolidate debt loans, you take out one loan that pays off your other creditors.
A debt consolidation loan may help you by giving you:
- A lower interest rate- Your new loan can reduce your interest significantly, so you save money. giving you more time to pay back the debt.
- A smaller monthly payment- Even if your interest rate remains the same, you can reduce the size of your monthly payment by extending the time you have to repay the debt. If you're struggling to make your monthly payments, having longer to pay back the debt at a lower monthly cost will help you, even if you pay back more in total interest over the course of the loan.
- The ease of one monthly payment to one creditor- Consolidating your debt simplifies your finances. When you bundle all your debts into one loan, you have just one creditor to deal with and one payment to send out each month.
Types of Loans to Consolidate Debt
There is more than one type of consolidation loan available. When you are looking for the beat consolidation loan, there are two main categories.
- Secured Consolidation Loan- A secured loan is one that requires you to have a valuable asset that you pledge as security for the loan. If you default on the loan, the lender can seize the security. The most common secured loan to consolidate debt is a cash-out refinance, where you use the equity in your home to pay off your current debts. A cash-out refinance requires strong income and credit, as well as a substantial amount of equity in your home. The benefits of a cash-out loan to consolidate debt is stronger when interest rates on loans are low, as they are now.
- Unsecured Consolidation Loan- You don't pledge any security to get an unsecured loan. Instead, you give the lender your word that you will repay. The most common form of unsecured debt consolidation loans are offered by banks and credit unions. It takes good income and credit to qualify for an unsecured consolidation loan. Interest rates are higher on unsecured loans because the lender takes a bigger risk lending to you without an asset to secure the loan. Unsecured loans to consolidate debt only make sense if you either lower your interest rate or get a loan for a longer term that lowers your monthly payment and prevents you from defaulting on your current loans.
Not everyone qualifies for a consolidation loan. You need to have strong income and credit. If you do have both, whether you have a home with equity or not, you should see if a loan to consolidate debt will improve your situation.
A lot will depend on the interest rates on your current debts. The higher the rates on your current debts, the more likely it is that you will benefit when you consolidate debt loans.
Finding the Right Loan
Here are a few tips to help you find the best loan to consolidate debt.
- Shop around- Comparison shopping is the smartest way for you to find the best loan you can. Speak with at least three different lenders, to get a good idea of what is available in the marketplace. Remember, the rates that are advertised may be lower than the rate you qualify for. Make sure you look at more than the interest rate. Pay attention to any costs you are quoted, too.
- Reputation and Experience-Do your homework on any lender you consider. Check out their reputation online. Look at how long they've been in business. See if they have professional accreditation as a business as well as checking out the credentials of any loan officer you work with.
- Net Tangible Benefit- Don't take out a loan to consolidate debt unless you clearly understand how it benefits you. Does it give you a lower payment? Does it protect you from defaulting on other loans, even if you're paying a higher rate or payment? Never let a lender pressure you into taking out a loan.
Alternatives to Loans to Consolidate Debt
If you aren't able to consolidate debt loans, because you don't qualify or can't find a consolidation loan that improves your situation, you need to look at other alternatives. Before you work with any professional debt resolution firm, however make sure you understand the pros and cons of the firm's method of resolving debts.
If you are struggling to make your payments and need professional debt management help, look into credit counseling and debt settlement.
A financial review with a credit counselor can help you develop a better budget. If a major financial problem is your high interest rates on your current debts, you may benefit from a credit counseling service's debt management plan.
Speak with an accredited debt settlement firm, if you have a financial hardship, need to lower your monthly payment, or if you are already falling behind on your payments. Make sure that the debt settlement firm you consider takes no up-front fees from you, only taking a fee from you for any account it handles until after it settles the account.
Dealing with debt
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q2 2022 was $16.15 trillion. Housing debt totaled $11.71 trillion and non-housing debt was $4.45 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1.739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in New Hampshire credit card delinquency rate was 2%, and the median credit card debt was $471.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.