Four types of debt consolidation loans

Debt repayment can be difficult, especially when you have to split your money between several different credit cards, loans, or other debts. You may have considered a debt consolidation loan that will help you pay off your debt.

A debt consolidation loan allows you to combine all your debts into one, lower interest rate loan. This is especially useful when you have high-interest debts.

Combining debts in this way allows you to reduce your monthly payment and make it easier for you to afford monthly bills. There are several different types of loans that you can use to consolidate your debt.

Home Equity Loans

A home equity loan is a loan that is taken from the equity capital in your home as collateral. You usually need to have a good amount of equity in your home and good credit to qualify for a home equity loan. Although interest rates are usually lower than other types of loans, the downside is that your home is now on the line for your credit card debt.

If payments become unavailable, you face write-offs in your home. Therefore, it is not usually a good idea to use a home equity loan as a debt consolidation loan.

Credit card balance transfer


With credit cards, you can transfer your credit cards to one credit card, ideally at a low-interest rate.

Low balance transfer interest rates are typically promotional rates that expire after at least six months. If you decide to transfer the balance, make sure you know when the low rate and the regular interest rate that will take effect for the remaining balance will expire.

If you want to use a credit card balance transfer as a debt consolidation loan, you need a credit card with enough credit limit to hold all the credit card debt.

There could be a shortfall in debt consolidation with balance transfer – a hit to your credit score. Putting too much debt on one credit card can have a negative effect on your credit score as credit utilization increases. The good news is that your credit score will deduct as you pay off your balance.

Personal Loan

Personal loans can be used as debt consolidation loans if you can borrow enough loans to cover all of your balance. A personal loan is an unsecured loan that has fixed payments over a period of time. Once approved for personal credit, you can use it to consolidate your debt.

Depending on your credit rating, you may have trouble getting approved for a personal loan. If you have bad credit, you may be approved, but at a higher interest rate or not approved at all.

Taking high-interest rates would allow you to combine balances, but you cannot save money in the long run.

Debt consolidation loans


Debt consolidation loans are offered by banks and credit unions with the aim of combining your debts. Debt consolidation loans vary, so it’s important to choose wisely. Debt consolidation loans ideally have a lower interest rate than the rates you currently pay.

Keep in mind that sometimes a lower monthly payment is achieved by increasing the repayment period. This could mean that you are paying more interest overall because of the longer repayment period.

Choosing the type of loan for debt consolidation

Know that with any type of debt consolidation loan, you really don’t get rid of your debt. Instead, you simply change so that it becomes easier to pay. You will feel like you have less debt and you may be tempted to borrow more.

Exercise discipline and avoid lending until the debt consolidation loan is fully repaid. Even then, it is important to use good judgment in taking on additional debt.

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