Debt consolidation loans are primarily used to pay off and simplify existing debts. You may consolidate multiple debt payments and credit accounts into a single account with a single lender and one easy payment.
Considering your creditworthiness, you might be offered lower interest rates from lenders. The interest offered should be lower than your existing interest. This way you can save money on monthly payments by cutting off the overall interest payment.
Another way to reduce your monthly payment is by extending your loan tenure. However, with a long loan term, you might end up paying more interest in total.
Typically, a debt consolidation loan can be used to consolidate unsecured debts. Common types of debt that can be handled through debt consolidation are
- Credit card debts
- Medical bills
- High-interest personal loans
- High-interest payday loans
Now let’s check out the different types of debt consolidation loans available for you
1. Personal loans
Taking out a personal loan to consolidate unsecured debts is the prime object of a debt consolidation loan. If you can borrow a big loan with a low-interest rate, you can use that money to pay off all the debts easily and save on interest payments. Multiple high-interest debts may cost you more on interest payments than one big personal loan with a low interest rate.
A personal loan is typically one of the most common types of debt consolidation loans. It is an unsecured loan where you need to make fixed monthly payments over a certain period.
Your credit score plays a crucial part when you want to get approved for a personal debt consolidation loan. If you carry an average credit score, you might get approved, but with a higher interest rate. You may not get approved at all if you have a bad credit score.
It is not wise to opt for a high-interest personal loan; because in the long run, you won’t be able to afford the monthly payments. Due to the high monthly payment, you might face difficulties to carry it till the end. So, you should research well and choose a personal loan that you can afford to pay throughout the loan term.
Once you’re approved for a suitable personal loan, you can use it to consolidate all your unsecured debts easily.
2. Balance transfer on credit cards
The balance transfer method is one of the most common strategies of a debt consolidation process. By using the credit card balance transfer method, you may transfer your unpaid credit card balances into one or several credit cards. , you should find a 0% APR balance transfer card (offered by credit card companies) to transfer your balances. However, you should make sure you choose a card that has a zero transfer fee, and 0% APR applied also on the new purchases made by that card. Stay focused and pay off the balances before the promotional rates expire, typically within 6 to 12 months.
Keep tracking the interest rates if you want to use a balance transfer credit card as a debt consolidation loan. After the 0% introductory period, the interest rate might increase and become very expensive; so act accordingly. Also, you’ll need a big credit limit, enough to transfer all of your other credit card balances.
You should also consider the drawbacks of consolidating credit debts with the balance transfer method. First of all, you can only consolidate your bills that you have paid through credit cards. Secondly, transferring your credit balances may hit your credit score. If you use too much of your available balance on one credit card, it might harm your credit score, as it will increase your overall credit utilization. But you may normalize your credit score once you pay off all the balance.
3. Home equity loans
A home equity loan is also considered as one of the different types of debt consolidation loans.
You may take out a home equity loan by using your existing home equity as collateral. The word equity stands for the market value of your house minus your outstanding mortgage loan. To get a home equity loan you must have a good amount of home equity in your pocket and a good credit score.
A home equity loan offers a lower interest rate than other types of loans. But one major drawback you should not ignore about home equity loans. You are deliberately using your home as collateral and taking out money to pay off unsecured debts. Practically that means you will be converting your unsecured debts into secured debts (with collateral) through the entire debt consolidation process. If you can’t afford the payments, you’ll be facing foreclosure on your property. So, normally it’s not wise to pick up a home equity loan to consolidate unsecured debts.
4. A loan taken out from family or friends
If you decide to borrow money from a friend or relative, it can be a safer option to consolidate your unsecured debts. You can get a debt consolidation loan from them, and you may not have to worry about interest payments at all.
If you have a good relationship with your family and friends, they might give you more than enough time to repay the money. Compared to the commercial lenders, they sometimes even spare you the interest. But in most cases, your friend or relatives may charge a lower interest rate compared to a bank. So, this type of loan is quite affordable for debt consolidation and easy to repay with time. Also, your friend or relative might be less strict if you miss one or two payments.
There is a catch if you ignore paying off the loan to your relatives or friends. If you fail to make monthly payments or to repay the entire loan, as a result your relationship with the friend or relative would be at stake. For that reason, you should think twice about getting a debt consolidation loan from someone close to you.
If you still need to borrow money from a friend or relative, make sure you get the loan agreement in writing, just as you do with a bank. The written agreement will be signed by both parties, you and your friend/relative. The agreement should include each detail of the loan in the agreement. You need to meet the deadline for paying off the loan every month. As there are no penalty charges or late fees associated with that loan, you must pay off the entire balance as per the agreement and within the time frame.
The best debt consolidation loan companies of 2020
These are the most popular companies which may provide you different types of debt consolidation loans as per your specific financial situations:
- Discover – Best Lender with no fees except late fees
- LightStream – Best Lender for funds in a day
- Avant – Best Loans for Average Credit
- Marcus by Goldman Sachs – Best Lender for Customer Service
- Prosper – Best Lender for loan for $2,000 or more
- SoFi – Best Lender for Overall loan service
- Upstart – Best Lender for Borrowers With FICO Scores As Low As 620
- OneMain – Best Debt Consolidation Loans
- Earnin – Best Personal Loan Alternative
Data courtesy – usnews.com
U.S. News examined all the top lenders and lending partners who deal with personal loans for debt consolidation purposes. The research reveals each lending company’s prime eligibility criteria. They are as follows:
- credit score requirements,
- loan terms,
- additional fees,
- repayment options,
- additional benefits/limitations.
Each borrower has different requirements while choosing the best debt consolidation loan. So, as a borrower you should keep these in mind. This way you may find the best-fit loan provider, as per your specific credit background and requirements.