How To Get Debt Consolidation Loans

How To Get Debt Consolidation Loans

2019/02/25

If you are struggling with your finances and your debts have become overwhelming, debt consolidation can prove to be a good solution. There are various methods to consolidate debts. You can choose the right option depending upon your specific financial and debt situation.

Each method requires you to meet certain eligibility criteria; so, you will have to look into that as well. Besides that, some of the options allow you to manage and pay off your debts on your own while some others may require you to sign up with a third party debt consolidator who will take care of everything on your behalf at a fee.

The basic concept of debt consolidation is to covert your multiple debt accounts into a single loan account so that you can easily manage and pay off your debts. Following is a brief rundown on the pros and cons of the five most common methods for debt consolidation.

Home Equity Loan

If you are a homeowner and are also fortunate to own a decent amount of equity in it, you can consider borrowing a home equity loan to pay off your high-rate debts in one go. Obviously, this method to consolidate debts is going to work only if the borrowed amount of this new loan is big enough to cover all your existing bills and debts that are causing financial nightmare for you.

The best thing about a home equity loan is that it charges very low rate of interest as compared to other conventional loans. In most cases, a large part of consumer debts cover credit card debts that usually charge very high rate of interest. If that is the case with you, you can easily settle all your existing credit card and other debt accounts using the money borrowed through a home equity loan.

You will eventually end up having a single low-rate loan account, which allows you to pay back in small monthly installments. However, in order to qualify for this method, you must have at least 40% equity in your home. You are also advised to do a thorough comparison shopping because many banks these days are offering special plans, such as no closing costs and 0% origination fees.

Cash Out Refinancing

If you do not have enough equity in your home, you can consider cash out refinancing to consolidate debts. In this method, you have to refinance your mortgage for a much larger amount of money than your home is actually worth. You get that extra amount of money in cash. Since the amount of the mortgage is increasing, the monthly payments will obviously also increase. But, you can avoid any increase in monthly payment by refinancing for a longer repayment term.

When the repayment term is a longer one, the monthly payments will automatically decrease; it is just that the financial liability to repay the loan will linger for a longer time. This way, in this method, you do not have to borrow a new loan; instead, you just have to refinance an existing mortgage in a way that may or may not result in higher monthly payments. You can use the extra money thus received to pay off your existing debs.

Personal Loan

Those who are not homeowners can consider borrowing a personal loan, but this option is viable only in a situation when you can qualify for low interest rate, which means you must have a good credit score. If you are trying to consolidate debts using a personal loan that is charging you a rate of interest higher than the rates charged on your existing debts, you will only end up increasing your monthly payment obligations. So, make sure you do your calculations thoroughly in advance.

This option generally works for those who have multiple payday loan debts and credit card debts outstanding in their name. Even if you have a poor credit score and are borrowing a personal loan from a sub-prime lender, the interest rate will never be higher than the rates charged by credit cards and payday loans.

Debt Consolidation Loan

If none of the above three methods work for you, you can still have an option to consolidate debts by getting a loan from a debt consolidation firm. These firms will first do a thorough review of your finances and debts. They will then contact your respective creditors and will try to negotiate a one-time settlement plan. It means they can actually help you reduce your debt burden.

Once the negotiated plans are finalized through a written contract, the firm will issue you a loan so that you can settle your debts as per the new agreement. This method thus also allows you to convert your multiple debt accounts into a single loan account with a lower rate and with easy repayment terms. However, there are certain qualifying criteria in this regard.

For example, you must be able to put an asset as collateral against the money you borrow from a debt consolidation firm. Besides that, some firms have also put a minimum limit on the overall debt balance, which usually ranges from $1000 to $3000. It means you may not be able to qualify for a debt consolidation loan if your total outstanding debt balance is less than that minimum limit.

Debt Consolidating Program

Last, but not the least, you also have an option to consolidate debts by signing up for the services of a legitimate and experienced debt consolidator. This method works similar to the above debt relief program; the only difference is that you do not have to borrow a new loan. In this case, the debt consolidation firm works as a mediator between you and your creditors.

After negotiating more affordable repayment terms, they will prepare a consolidation plan for you, where you will be required to pay a single consolidated payment every month to the firm while the firm will further transfer the payments to your respective creditors. The debt consolidator will obviously charge a fee for this service.

No matter which of the above methods you choose to go for, you have to be very careful in your approach. For example, if you are trying to consolidate debts by signing up for the services of a debt consolidator, you must make sure that the firm is a legitimate one with impressive success record. You can check their past records by contacting the Better Business Bureau (BBB).

Photo Credit: Debtmanagementthatworks.blogspot.com

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