What is debt consolidation?
Debt consolidation is a way to simplify your financial situation by consolidating all your debts into one loan. This can be done in many ways including using credit cards, applying for personal loans, using an online service, or even taking out a home equity loan.
Most people accumulate significant debt in their lifetime, from medical bills to school debts, loan companies hit you when you are most vulnerable. To mitigate the amount of debt you are in, you might want to consider debt consolidation if you can’t pay back all your bills on time.
Types of debt consolidation
Debt consolidation loans come in many forms. They can help you pay off multiple credit card bills into one payment, or lower the interest rates on several high-interest accounts. You might even consider consolidating student loan payments with federal student loans.
A personal loan is one of several types of consumer loans. It includes mortgages, auto loans, student loans, and lines of credit. Personal loans are often referred to as consumer loans because they are meant to help consumers pay for things like cars, homes, college tuition, and even weddings. However, there are some important differences between personal loans and consumer loans.
The main difference between a personal loan and a consumer loan is that a personal loan must be repaid within a certain timeframe. Usually, this timeframe ranges from three months to five years depending on the lender. In contrast, consumer loans typically do not have a set repayment term. Instead, the borrower usually pays back the entire amount over a period of time with monthly payments ranging from six months to 10 years.
Anyone can apply for a personal loan. However, lenders tend to give out personal loans to borrowers who have good credit scores. Lenders want to ensure that the borrower will repay the loan without defaulting. Therefore, they look for evidence that the borrower has been responsible with his or her finances in the past.
Unsecured Line of Credit
An unsecured line of credit is a type of loan where there is no collateral required. This allows individuals to borrow money without having to provide anything as security. In return, they are charged a high interest rate. If you want to use an unsecured line of credit, you’ll need a good credit rating.
The advantage of an unsecured line is that it does not require any assets to secure the loan. However, this makes it more expensive than secured loans. A line of credit is a type of revolving credit. This means that once you’ve paid off your balance, you’re free to take out additional funds. You can choose how much you want to borrow. When you do decide to draw down your credit, you’ll be asked to pay back the amount borrowed plus interest over a set period of time. This type of credit is usually offered by banks and financial institutions.
Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) is a type of loan used to borrow against the value of your home. With a HELOC, you use the equity in your house to pay off a portion of the balance each month. You can apply for a HELOC even if you don’t plan to buy another house anytime soon. However, keep in mind that you’ll likely want to take out a new mortgage once you decide to purchase a home.
For example, say you’ve got $100,000 worth of equity in your current home. If you took out a $10,000 HELOC, you’d owe about $90,000 over the life of the loan. At the end of the term, you’d have paid back about $20,000.
The advantage of taking out a HELOC is that it lets you tap into the equity in your existing property without having to sell it. If you later decide to move, you won’t lose the money you invested in the home and if you decide to refinance, you could save thousands of dollars in interest payments.
Home Refinance Loan
Many people borrow more money than they need so they can roll over their high-interest credit card balances into a lower-rate home loan. This strategy works great for some people, but it doesn’t work for everyone. If you’re looking to refinance your home loan, there are three things you’ll want to know about refinancing your home loan. First, how do I qualify for a home refinance loan? Second, what is my interest rate? And third, what does “rollover” mean?
How does debt consolidation work?
Debt consolidation loans don’t always mean consolidating multiple debts into a single loan, although if this is the solution you are looking for, you can adopt this approach to debt consolidation. You can also consolidate your existing debt into a lower-interest loan. For example, let’s say you owe $10,000 on five credit cards, each with a variable interest rate ranging from 19% to 29%.
If you took out a consolidated loan that had a fixed interest rate of 10%, you’d still be charged the same total amount over the life of the loan ($1,500), but the interest charges would be much less per month since it would take five months to pay off the entire loan compared to 30 months to pay off the original five credit cards.
Is consolidating debt really worth it?
Consolidating debt allows you to pay off multiple debts at once instead of paying them individually. Reducing your overall debt load is the main reason for consolidating debt.
When debt consolidation loans work, the new interest rate must be less than the previous rates paid by the debtor for each of their debts. If the new interest rate is higher, then it may not be worthwhile to take out a debt consolidation loan. Plus, there may be additional costs involved apart from the interest rate offered. You need to take this into account when making a decision.
How much does consolidating debt cost?
When looking into consolidation loans, you should be aware of extra fees and charges that might come up when calculating the total cost of borrowing.
The average cost of debt consolidation services
Debt consolidation loans are used to consolidate multiple debts into one single payment. They are offered by traditional banks at interest rates ranging between 7% and 20%. Lenders may also offer alternative financing options such as payday loans and personal loans, where the interest rates can reach levels of 40% per annum. These higher-interest alternatives should only be considered if your current debts cannot be satisfied within a reasonable period of time.
Factors that affect the cost of debt consolidation
Different factors and additional costs may be included in debt consolidation which will affect the overall amount that you pay.
Some additional costs that you may incur include:
- Origination fees
- Balance transfer fees
- Closing costs
- Annual fees
Consolidators will also consider if you have a poor or strong credit score, how much debt you need to consolidate, the repayment period, the minimum payments you can make, and the debt consolidation rates with the company or bank you choose to consolidate with.
Debt consolidation loans
Unsecured debt consolidation loans are normally a type of unsecured loan used to consolidate existing debts and other obligations. However, if unsecured debt consolidation is not for you, you can obtain secured debt consolidation loans if you remortgage to free up equity from your house to clear other ongoing debts.
Are consolidation loans expensive?
Debt consolidation loans are generally considered to be slightly more expensive compared to other types of unsecured loans. However, you can still find debt consolidation loan offers with more lucrative monthly payments than other lenders and credit card companies.
Does consolidating debt save money?
It depends. If you have crunched the numbers and know that once you have consolidated your debt, you will not end up in further debts from additional spending, you will definitely save money. However, if you are seeking debt consolidation as a short-term solution to an ongoing problem, there is a good chance that you will continue to get into more financial trouble and will end up paying more.
When you should consolidate your debt
The aim of debt consolidation is to make it easier to manage your finances and keep up with payments. However, there are many things to think about when considering a debt consolidation loan and whether it is right for you to do at this point in time. You want to make sure you weigh the pros and cons of each option.
The following questions can help guide you through the process:
- How much do I owe?
- What type of repayment plan am I looking for?
- Is my current lender offering me a better deal?
- Are there any fees involved?
- Can I afford to repay the loan?
Once you have looked at these factors and assessed whether or not debt consolidation is the right option for you, you should begin the process immediately as you do not want your finances to get out of hand uncontrollably.
Can I get a loan with bad credit?
If you’re not sure if you qualify for a loan, you could still get one at an interest rate that’s higher than you’d normally pay. If you don’t have a good credit history, some lenders may offer you unsecured personal loan options. Before applying to one of them, you should check your credit score.
Debt consolidation services
Dealing with debt payments and any form of outstanding debt can be extremely stressful, which is why Refinancement Hypothécaire is here to walk you through the process of debt consolidation.
Our team is here to help you come up with a debt consolidation plan that works for you! We want to make sure that you are able to reach your financial goals by providing you with all the tools and resources you need to achieve a life of financial freedom.