After many months of floundering in debt, you’ve decided upon debt consolidation as a life raft. But what’s the best debt consolidation loan for your needs?
Let’s take a look.
What Is A Debt Consolidation Loan?
It’s a financial strategy designed to clear multiple high-interest debts with a single, low-interest loan. Debt consolidation streamlines bill paying for those juggling unsecured debts such as credit cards, medical bills or personal loans.
So, what is the best debt consolidation loan for your needs? It’s important to do your homework and comparison shop to find the approach that best suits your situation. While such loans are available from banks, credit unions and online lenders, it’s crucial to get the right interest rate and other terms for your needs.
Note however, debt consolidation doesn’t eliminate debt. Rather, it restructures it, hopefully in a more positive fashion. You still ultimately end up repaying what you owe.
Before Consolidating Debt
Before you make your move, pinpoint the bills you wish to consolidate. Such loans typically deal with credit card debt.
Go over your budget and see what kind of monthly payment you can comfortably afford then scour your credit report to make sure nothing’s amiss. It’s also important to know your credit score so that you know what your loan options are and the interest rate you can expect.
Types Of Debt Consolidation Loans
Among the four major types of debt consolidation loans are home equity loans, credit card balance transfers, loans from family or friends, and unsecured personal loans.
Home Equity Loans: If you have equity in your home, a home equity loan for debt consolidation could be a good choice, since interest rates should be substantially less than what you pay on your credit cards. The interest rate on home equity loans was around 5.5 percent last November, while the average interest rate on credit cards was 17.98%.
Credit Card Balance Transfers: The least expensive option for debt consolidation is a zero percent interest balance transfer card. Such cards allow you to transfer the balance from all your credit cards to a single card and pay that off with no interest for a promotional period that lasts from six to 24 months.
Keep in mind that eligibility for the best deals requires an excellent credit score – at least 740 – and 680 or higher for any other deals. The latter offers are usually for six to 12 months.
Note any balance transfer fees – usually two to three percent of the amount owed — which some credit card companies charge up front. And be sure you can pay off your whole debt within the card’s introductory period, before the regular rate kicks in.
Loan from Family or Friends: Hey, if your parents or a close friend will help, a personal loan could be a good bet, since terms and interest rates will likely be flexible and amenable. You must repay this loan in full and on time, however, or risk the relationship. Make sure terms are in writing.
Personal Loans for Debt Consolidation: Personal and debt consolidation loans — different names for essentially the same thing – have interest rates that are based on your credit score.
This strategy could really work for people with heavy debt that is spread out over several credit cards. Basically, this loan allows you to pay credit card debts in full. A new, large loan supplants multiple smaller ones.
Benefits include one monthly payment to one source and the opportunity to improve your credit score over time by making timely payments.
However, for this strategy to work optimally, you do need good credit. And even if you are approved, your interest rate may be so high that it doesn’t make sense when compared to what you pay on current debt.
So, what’s the best debt consolidation loan for your needs? It’s one that gets you where you need to be. Do your homework and decide what’s best for you.