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Choosing debt consolidation loans – how to do that?

Image credit: CreditRepairExpert/Flickr

Debt consolidation may be the answer if you are in financial trouble, but choosing debt consolidation loans is also important

choosing debt consolidation
Image credit: CreditRepairExpert/Flickr

If you have a lot of debt, you’re not alone. Today, more and more locals are burdened with credit card and loan payments. So whether you are trying to improve your money management, having difficulty making ends meet, want to lower your monthly loan payments, or just can’t seem to keep up with all of your credit card bills, you may be looking for a way to make debt repayment easier. Debt consolidation may be the answer, but choosing debt consolidation loans is also important.

What is debt consolidation?

Debt consolidation is when you roll all of your smaller individual loans into one large loan, usually with a longer term and a lower interest rate. This allows you to write one check for a loan payment instead of many, while lowering your total monthly payments.

Choosing debt consolidation – how do you do it?

There are many ways to consolidate your debts. One way is to transfer them to a credit card with a lower interest rate. Most credit card companies allow you to transfer balances by providing them with information, such as the issuing bank, account number, and approximate balance. Or, your credit card company may send you convenience cheques that you can use to pay off your old balances. Keep in mind, however, that there is usually a fee for this type of transaction, and the lower rate may last only for a certain period of time.

Another option is to obtain a home equity loan. Most banks and mortgage companies offer home equity loans. You’ll need to fill out an application and demonstrate to the lender that you’ll be able to make regular monthly payments. Your home will then be appraised to determine the amount of your equity. Typically, you can borrow an amount equal to 80 percent of the value of the equity in your home. Interest rates and terms for home equity loans vary, so you should shop around and compare lenders.

Some lenders offer loans specifically designed for debt consolidation. Again, you’ll need to fill out an application and demonstrate to the lender that you’ll be able to make regular monthly payments. Keep in mind, however, that these loans usually come with higher interest rates than home equity loans and, depending on the amount you borrow, may require collateral on the loan (e.g., your car or bank account).

Choosing debt consolidation has advantages

  • The monthly payment on a consolidation loan is usually substantially lower than the combined payments of smaller loans
  • Consolidation loans usually offer lower interest rates
  • Consolidation makes bill paying easier since you have only one monthly payment, instead of many

Choosing debt consolidation also has disadvantages

  • If you use a home equity loan to consolidate your debts, the loan is secured by a lien on your home. As a result, the lender can foreclose on your home if you default on the loan.
  • If the term of your consolidation loan is longer than the terms of your smaller existing loans, you may end up paying more total interest even if the rate is lower. So you won’t actually be saving any money over time, even though your monthly payments will be less.
  • If you use a longer-term loan to consolidate your debts, it will take you longer to pay off your debt.

Choosing debt consolidation – should you do it?

For debt consolidation to be worthwhile, the monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual loans. If this isn’t the case, consolidation may not be your best option. Moreover, the interest rate on your consolidation loan should be lower than the average of the interest rates on your individual loans. This allows you not only to save money but also to lower your monthly payment.

You owe it to yourself to determine if consolidating debts into one loan makes sense. You may be able to reduce your interest rate and if you use a home equity loan, you may be able to save some taxes. However, just like with any financial transaction, you must consider all the debt consolidation factors and risks.

Choosing debt consolidation is a complicated question. Debt consolidation services are for mainly for credit cards, or unsecured personal loans. This means, no “secured” debts can be included when you are doing debt consolidation – this includes house, or car payments, and any loans or accounts with collateral attached.

Only consumers having difficulty meeting monthly payment requirements or are unable to reduce their balances should apply for debt consolidation.

What is the fastest way in consolidating debts

For advise on consolidating debts you should talk to the loan consultants. They can set you up on a path that can get you a loan in a quick and seamless manner. Good loan consultants have close links with the best lenders in town and can help you compare various loans and settle for a package that best suits your needs. You should also find out about money saving tips.

Also consider affordability tools to help you make better loan decisions. Loan Calculators help you ascertain how much you will actually pay for the loan you will take.

You should also find out more about Peer to peer lending versus that of SME loans so as to make an informed decision: SME Loans or Peer-to-peer (P2P) Lending – What is the difference?

Written by Ravi Philemon

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