Debt consolidation loans – what it is and what the different types are

Debt consolidation loans

If you are an adult, then chances are that least at some point of your life, you have or you will have some financial problems. In case you are reading this, it is quite possible that you are going through a difficult financial situation right now. If the stress of carrying multiple debts has become too much for your to bear and you are looking for a solution, then you may just be at the right place.

Is getting out of multiple debts even possible?

Is getting out of multiple debts even possible?
Is getting out of multiple debts even possible?

The answer to that question is yes. Eliminating multiple debts is not impossible. Though it can be a tough process, it is also quite achievable. In fact, carrying more than one debt is something rather common these days. Since most people are having difficulty paying their monthly bills on a regular basis, it is only natural that loans start to pile up. So people end up repaying multiple debts.

Why many people are in debt?

The reasons for that can be many and quite different. Here are some of the most common reasons for people to start carrying debt:

  • Why many people are in debt?
    Why many people are in debt?

    For some, a debt may be a sort of self-investment. For example, if you want to be successful and have a good career, in most cases to achieve that you would need to have a college degree. However, paying for a college education is not something that many people are able to afford. Sure, if you have a rich family, paying for college will not be a problem to you. But the reality for most people attending colleges is quite different. Usually, the only way for such people to afford their college education is to take out a student loan. Even though student loans are not considered as a bad way to invest in your future, most people who use this service do not completely realize that there is a pretty big chance that they will be repaying their student loans for the rest of their lives.

 

  • Others go into debt because of their desire to have their own home. Buying a house has always been the American dream. However, in today’s economy, buying a house all on your own is pretty impossible. This is why in order to have their own home, many people take out house loans.

 

  • And of course, there are those who get into debt because of a lack of alternatives. Nowadays, even for people who work really hard, who have a stable source of monthly income, even they are often struggling with their monthly bills. Now imagine losing your job, or miscalculating your monthly budget, and there you go – a loan is on the way. The truth is that even those who do their best to plan their budget, calculate all their future income and expenses, the truth is that even they are not safe from financial trouble. Sustaining a stable financial state for a long period of time, even when you plan your budget to the best of your capabilities, is almost impossible because more often than not, people are facing unexpected financial expenses. And when you are barely making your regular monthly bills, an unexpected emergency expense can push you over the edge and make you take out a loan. And once you start to take out loans, it is hard to stop. Sooner or later, you will find yourself in a situation where you have to take care of multiple loan repayments on top of all your regular monthly expenses like food and electricity bill.

So how can you get rid of multiple debts?

There are more than one ways to do it. However, probably the most popular method that many financially troubled people use is a debt consolidation loan.

 

  • What is a debt consolidation loan?

 

What is a debt consolidation loan?
What is a debt consolidation loan?

Debt consolidation loan is a loan that is basically a combination of all your existing debts. If you are qualified for a debt consolidation loan, all of your current debts will be combined into a completely new, huge loan. Getting your multiple debts combined into a single loan payment can give you many benefits, such as:

  1. With getting a debt consolidation loan, you will get new terms for this loan. These terms, especially if you have a perfect or at least a good credit score, are going to be significantly better than the overall terms of your existing multiple debts. That includes a lower interest rate and fees. In case you have a bad credit score, qualifying for a debt consolidation loan might still be possible, however, getting better loan terms is going to be quite hard.
  2. By consolidating your multiple debt payments into a single monthly payment, you will have to focus only on a single payment at the and of each month, as opposed to paying multiple bills. Thinking about a number of bills, trying to calculate your budget, so that you are able to afford all of them, as well as your regular monthly bills, can be very stressful and exhausting. Being able to concentrate only on a single monthly loan payment will definitely make your life a lot easier and will give you time for the other important aspects of your life. After all, we only get one life to live, nobody wants to spend it in constant stress over multiple bills.
  3. By consolidating your multiple debts with a debt consolidation loan, you will be able to reduce your overall monthly payment. That alone can give you some breathing room in your budget planning. It will be easier for you to afford your regular monthly bills, as well as being able to afford some other stuff that you may want.

Different types of debt consolidation loans

If you are considering consolidating your multiple debts with a debt consolidation loan, there are a few options that you can choose from depending on your specific financial situation and what you are looking for.

  • Home Equity Loans

 

Home Equity Loans
Home Equity Loans

Home equity loans are a loan type that is available to borrowers who can offer the equity of their homes as a collateral for the loan. For that to happen, one usually needs to have a good amount of home equity and a fairly good credit score so that he can qualify for a home equity loan. Even though home equity loans normally have lower interest rates compared to some of the other debt consolidation loan types, they do have also a downside. If for some reason you are not able to continue making your home equity debt consolidation loan payments, you may face foreclosure on your house. This is why using your home as a collateral for a debt consolidation loan may not be the best idea for most people.

  • Personal loans

 

A personal loan may be used as a debt consolidation loan in the cases where you are able to borrow a big enough loan amount. Personal loans are unsecured loans with fixed monthly payments over a scheduled period of time. Once you qualified for a personal loan, you will be able to use that loan to consolidate your multiple debts. Depending on the state of your credit score, whether it is good or bad, you may find it difficult to qualify for a personal loan. However, even if your credit score is bad, you may still be approved for a personal loan. But usually with a bad credit personal loan, you will not be able to get good loan terms and will most likely have a higher interest rate.

 

  • Credit card balance transfers

 

Credit card balance transfers
Credit card balance transfers

By using a credit card balance transfer, you will transfer all your current credit card balances onto a brand new credit card that can potentially have a 0% interest rate, or at least an interest rate that is lower compared to the interest rates on your current credit cards. These lower interest rates usually are only for a limited period of time. In case you decide to go with this debt consolidation option, make sure you find out when the low-interest rate terms expire and what the standard interest rate going to be.

 

  • Picking a debt consolidation loan type

 

Picking a debt consolidation loan type
Picking a debt consolidation loan type

Keep in mind that debt consolidation loans are not some magical trick that will make your multiple debts disappear into thin air. A debt consolidation loan is a financial tool that can help you pay off your debts in a faster and easier way. With having a lower monthly payment, you may at a certain point, be tempted to borrow yet another loan. Be sure to understand the dangers of such situations and hit the brakes before you do something that will put you in a worse place than you were before consolidating your debts in the first place.

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