You may have already decided that a debt consolidation loan is the best way forward to manage your finances. There can be many advantages to a debt consolidation loan – easier financial management, single repayments, and you can often save money long term on interest payments and fees. However, there are many different types of debt consolidation loans, each with their pros and cons, so how do you know which debt consolidation loan is right for you? Below is a look at four different types of debt consolidation, and the advantages and disadvantages of each so that you can consider which one is most suited to your needs.
Debt consolidation loans
Some banks and credit unions offer specifically designed loans for debt consolidation. Of course, with any loan or service offered by banks, there are many different options with big differences in terms and conditions, so it is important that you investigate each one fully.
One factor to consider is interest rates: ideally, you will find a debt consolidation loan which has a lower interest rate than your current debts. You should also carefully check payment rates and repayment periods with some degree of caution. Sometimes, lenders offer a lower monthly payment, but this means that the repayment period is increased, and so you must pay more interest over the life of the loan.
Equally, a personal loan can be a good way to consolidate your debt. Although a personal loan is bot branded as a debt consolidation loan, you can effectively use it the same way to bring your debt together under one loan and there for simplifying your repayments and (hopefully) lowering the interest you are paying.
Personal loans are well suited to this purpose as they are unsecured, and you can generally use them to for any purpose.
On the downside, depending on the size of your debts and on your personal circumstances, you may not be able to borrow enough to consolidate all your debts. Personal loans also typically have fixed monthly repayments which need to be paid off in a set period (in contrast to a credit card for example) which may be a good way for your to responsibly pay down your debt. On the other hand, if you are on a fluctuating income you may struggle to meet these fixed repayments every month.
As with debt consolidation loans, there are a wide variety of options with many different rates and conditions, so you should do your research to find the one which is best suited to you.
Home equity loans
Another type of loan which can help you consolidate your debt is a home equity loan. These loans have the advantage that they usually have much more favourable interest rates compared to other types of loans or credit cards. However, not all home owners are eligible for a home equity loan so you will need to check that this is possible for you. As a general rule, you will need to have a good credit rating and to have paid off a reasonable proportion of your home to be eligible for this type of loan.
Perhaps most importantly, they also come with considerable risk: as you are using your home as a guarantee for the loan, if you are unable to make loan repayments you could eventually lose your house! So you should definitely consider carefully before taking out a home equity loan in order to consolidate your debt.
Credit card consolidation
Moving all your credit card balances (and possibly some other debts too) on to a single credit card may also be a good option to consolidate your debt. As with other types of debt consolidation, you want to try to find a credit card which has a low interest rate, and ideally a lower rate than you are currently paying.
One way to achieve this may be through a promotional offer credit card which offers low interest rates for an introductory period, usually six months. This can be a good way to pay down, or pay off, your debt, but when doing your calculations as to what is the best option for you, be sure to factor in that the rates will go up after the first six months, and make sure you know what the regular interest rate will be!
Another reason to be cautious of using a credit card to consolidate your debt is that it may damage your credit rating. If you put a large amount of debt on one credit card you may find you put a dent in your credit rating, making it harder for you to get approval for future loans for years to come!
It is important to weigh up these options, and the pros and cons of each one, when considering which debt consolidation loan is right for you.