Debt consolidation loan – What is it and what are its various types?
In case you are buried under a huge pile of debt you may want to consider debt solutions to get rid of your debts. You may be able to make the minimum payments on all your debts but due to multiple bills you are not being able to handle your debts. In such a situation you must consider a debt solution called debt consolidation. You can take out a consolidation loan or take the help of a debt consolidation company or you can even consolidate your debts yourself.
What is debt consolidation?
Debt consolidation is simply a debt solution that helps you to group all your multiple debts into a single outstanding debt. If you opt for this your interest rate is reduced and you have to pay only one creditor instead of many. This debt solution may also lead to your late fees and other charges being waived off.
What is debt consolidation loan?
There are many ways in which you can consolidate your bills. Out of all these ways taking out a consolidation loan is one way. In this case you take out a loan and use this to pay off all your multiple bills. Thus, you repay all your debts and are left only with one. You now have to make payments only towards the consolidation loan. An added advantage that you get on consolidation loans is that the rate of interest that is charged is much lower than what your creditors will charge you. So, you pay back your high interest loans by taking out a low interest debt consolidation loan.
What are the types of debt consolidation loans?
There are several types of debt consolidation loans that you can choose from. Some of them are as follows.
1. Home equity loans: When you take out a loan where the collateral is the equity in your home, then that loan is called home equity loan. This loan can be used as a consolidation loan. It is important for you to note that in order to qualify for such a loan you have to have good credit and also a good amount of equity on your home. The advantage that this loan provides you with is that the rate of interest is quite low in comparison to what your creditors charge. However, there is one disadvantage. The disadvantage is that your home comes at a risk because of your unsecured debts. If you do not make the payments regularly your home may stand a chance of being foreclosed. Thus, you must opt for this consolidation loan after you have considered all aspects.
2. Personal loans: These are loans that are available for all sorts of proposes and are not specifically taken out for consolidating debts. They are unsecured loans and you have to make fixed payments every month towards them. Qualifying for personal loans depends on what state your credit score is in. If you have bad credit, then you may be denied a personal loan. In such a case even if your loan is granted you will be charged a high interest rate. Thus, your credit history is an important factor. Once your loan is granted you can use it to pay off all your multiple bills.
3. Debt consolidation loans: These loans are provided specifically for the purpose of consolidating your bills. These loans are generally offered by banks as well as credit unions. They have an interest rate that is much lower than the interest rate charged by your creditors. They help you increase the repayment period and also lower your monthly payments.
These are the few types on consolidation loans that you can consider when planning to consolidate your bills.