Loans to consolidate debt can be useful when it comes to getting your personal finances back on track. Debt consolidation loans combine many of your monthly payments into one, which makes them easier to manage. Ideally, you can also get a lower interest rate, helping you save money.
With that in mind, here’s what to look for in a debt consolidation loan.
Debt Consolidation Loan Types
Balance Transfer Credit Card Deals
These are sometimes offered at super low interest rates—some as low as zero percent—for a certain amount of time. You can save a lot of money on interest if you pay off the transferred amount within the window the card agreement allows. However, there can also be transfer fees to consider.
Here’s the thing though, you have to be careful to only transfer as much as you can pay off before the promotional period ends. If you still have a balance when the promotional rate expires, the remaining amount will typically accrue interest at the card’s standard balance transfer APR—which may be high. Additionally, missing a payment may trigger a penalty APR as high as 30%, depending on the card’s terms. That’s why reading the fine print is essential before using a balance transfer for debt consolidation.
Home Equity Loans
Once you’re approved for one of these loans to consolidate debt, you’ll be allowed to borrow a percentage of the equity you have in your property. Equity is the difference between the fair market value of your property and the amount you owe against it. For example, if the value of your property is $100,000 and you owe $20,000, you’ll have $80,000 in equity.
You can then use that money to pay off your debts once the loan is granted. Afterwards, you’ll make a single payment to the home equity lender each month. Interest on home equity loans is usually lower than interest on credit card debt, so you’ll realize considerable savings.
The main thing to watch out for here is to be sure you can pay that loan off according to the agreement. You’ll pledge your property as collateral against a home equity loan. This means the lender can force you to sell it to get its money back if you can’t meet the terms of the loan agreement.
Debt Consolidation Loans
Many debt consolidation loans are unsecured, meaning you don’t have to use collateral (like your home) to get them. Qualifying for an unsecured loan may be more difficult, because it’s secured only by your promise to pay. As a result, you’ll likely need a good credit score to get a good deal on a debt consolidation loan. This is important because you’ll need to get the lowest possible interest rate to make the debt consolidation loan make sense.
In Summary
Knowing what to look for in a debt consolidation loan can help you figure out which type is the best solution for your situation. Regardless of the method you consider, you have to do the math so you can be sure the total amount you’ll pay is lower than it would be if you kept paying all of your debts separately.
SmartSpending’s personal debt consolidation calculator can help you figure this out. The calculator can also make it easy to compare each debt consolidation option side-by-side, so you can see what your monthly payments might be with each type of consolidation loan.
One more thing to consider: debt consolidation loans don’t erase your debt. They just move it. However, any credit cards you pay off will suddenly have zero balances. This can make it tempting to start racking up more debt on them. But if you don’t manage your spending wisely, you could wind up right back where you were before you did the consolidation.
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