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You can consolidate high interest credit card debt many ways, including home equity products (if you own a home), balance transfer credit cards, and personal loans.
Here are four reasons why you might want to consider a debt consolidation loan to settle your high-interest debts.
If you want to consolidate your debt, Credible makes it easy to view your prequalified personal loan rates from various lenders, all in one place.
What is debt consolidation?
Before we dive into why a debt consolidation loan makes sense, let’s define what it is. Debt consolidation consolidates multiple debts into one account with one easy-to-manage payment. It’s a strategy you can use to simplify the debt repayment process and potentially save money on interest. If you are overwhelmed with debt, debt consolidation can be a smart move.
Although you can consolidate your debts in several ways, the personal debt consolidation loan is one of the most popular. With a debt consolidation loan, you take out a new loan to repay one or more unsecured debts that you already have. It gives you a manageable monthly payment so you don’t have to worry about juggling multiple debts, interest rates, and payment due dates.
It’s important to understand that while a debt consolidation loan can treat the symptoms of your financial problems, it won’t treat the root cause. Think of it as a tool to give yourself some breathing room so you can get back on your feet and devise a long-term plan for a better financial future.
ADVANTAGES AND DISADVANTAGES OF DEBT CONSOLIDATION
1. Reduce the overall cost of your debt
A Personal loan can help you reduce the cost of your debt in two ways. If you’re able to lock in a lower interest rate than you currently have on all of your debt, you can save hundreds or even thousands of dollars in interest.
Plus, a personal loan gives you a specific end date for paying off your debt. It can help you stay focused on your goals and pay off your debt faster.
Visit Credible for compare personal loan rates from various lenders, without affecting your credit.
2. Refinance your debt without risking your home or other assets
Although home equity products – such as home equity loans and home equity lines of credit (HELOCs) – may come with lower interest rates than personal loans, they have some disadvantages you should consider:
- Deplete your home equity — Because a home equity loan relies on the value you have built up in your home, you can find yourself underwater on your mortgage and owing more than your property is worth if the value of your home decrease. This could be a serious problem if you are planning to move soon.
- Put your home at risk — A home equity loan puts your home as collateral. If you fail to make your payments, you could lose your home through the foreclosure process.
- May not qualify — Most lenders will not give you home equity loan or HELOC unless you have some equity in your home. Your equity is the difference between what you owe on your mortgage and the current value of your home. Although each lender has their own criteria, most will be looking for at least 15% equity.
A debt consolidation loan, on the other hand, requires no collateral, which means you won’t have to put your house, car or other assets on the line. You can also lock in an interest rate below the one you could get with a credit card.
Your rate will likely be fixed instead of variable (as it would be with many HELOCs), so you can budget your payments in advance. And if you have good or excellent creditit may be easier to qualify for a debt consolidation loan than a home equity product.
3. Reduce your monthly payments
If you have a lot of high-interest credit card debt and take out a personal loan with a lower interest rate, you may be able to lower your monthly payment amount. This can free up your cash flow and give you more money to spend on your emergency fund and other financial goals, such as saving for a home or for retirement.
Choosing a personal loan with a longer term can also result in lower monthly payments. But keep in mind that if you go this route, you will pay more interest over time.
4. Simplify your debt
When juggling multiple loans and credit cards, it’s easy to miss a bill payment. Missing a single payment can impact your credit.
A debt consolidation loan allows you to combine several monthly payments into a single loan with a fixed interest rate. It can make the debt refund much more manageable process and reduce your risk of missed payments. Many personal lenders also offer discounts for setting up automatic payments, which will ensure that your monthly loan payments are made on time.
If you’re ready to apply for a debt consolidation loan, Credible makes it quick and easy compare personal loan ratess to find the one that best suits your needs.