Debt consolidation is a form of debt refinancing that involves taking out one loan to pay off other loans. The process can secure a lower overall interest rate for the entire debt load and provide the convenience of servicing only one loan. While most of this debt is from mortgages and student loans, some of it comes from credit card debt. Credit cards and other unsecured credit can costs you a large amount of money each month in interest payments. This is money that can be used or saved. Getting a consolidated loan is not just so you only have to pay once a month. What it offers is a chance to pay off your entire debt at a lower interest rate. That means you can put down more than the minimum monthly payment and pay the whole amount off faster. The other advantage is that if you consolidate your loans soon enough, you can avoid – or at least minimize – the dent to your credit rating.
With the high interest rates credit card companies charge falling behind on only a few payments can lead to a seemingly insuperable debt load. This can quickly become stressful. To get rid of the burden you may get a second job or sell off your assets. There are other options to reduce the debt load.
Debt Consolidation Loans
Debt consolidation loans help you settle debts so you can streamline your finances with one regular payment. As the name suggests, you consolidate all your debts into one loan so you only have one monthly payment. A debt consolidation loan can be secured or unsecured. A secured loan needs collateral. An unsecured loan is based on your income, credit score, and ability to pay.
Most debt consolidation loans are offered by lending institutions such as banks, credit unions, and private lenders. The overall lower interest rate and payment is the advantage of a debt consolidation loan. However, if you have a low credit rating you may have trouble getting approval.
Debt Consolidation Companies
Debt consolidation companies negotiate with your creditors to lower interest rate, your balance, and other fees. Debtors make a single payment to debt management company which then pays all creditors until debts are paid off.
There are two methods of debt consolidation:
This strategy consolidates unsecured debt into a single monthly payment that you send to a debt consolidation company. That company then distributes the designated funds to your creditors. The debt consolidation company works directly with your creditors to secure benefits that help you fulfill your obligations over time. Benefits with this approach may include interest rate reductions, late and over-the-limit fee waivers, and reduced monthly payments.
This plan helps people who can not repay their debt in full and are facing bankruptcy. Under this arrangement your debt consolidation company will approach your creditors with an offer to settle your accounts for a portion of the amount owed.
Home Equity Loans for Debt Consolidation
Home equity is the difference between what your property is worth and what you owe. If your home is currently worth $300,000 and your mortgage balance is $200,000 then you have $100,000 of equity. In this case you can use a home equity loan to pay off your credit card or other debts. The interest on home equity loans is typically lower then credit card rates and is usually tax deductible. This can be an efficient repayment method if you can responsibly make your payments. A debt consolidation loan needs to be done with caution because after restructuring it opens the borrower up to accumulating more high interest rate debt on the now zeroed out credit cards. Resulting in a more difficult situation than before.
If you have high credit card debt and you wish to see if you qualify for a debt consolidation home mortgage loan, or refinancing, please contact our mortgage specialist. We will assist you in finding the best possible solution for your unique situation.