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The Debt Consolidation Loan is a personal loan that consolidates high-interest debts such as payday loans, credit cards and other bills. It can also be used to obtain a fixed-rate loan. You can use the funds to pay off any other debts after you receive them. By paying off your loan on time, getting a lower interest rate and not taking on additional debt you are unable to handle, you might be able to pay down your debt quicker and save tons of interest. This is how it works.
While these loans can be a great way of consolidating payments and hopefully lowering the interest rate on your debts, there are other debt consolidation loan alternatives available for those who don’t qualify. A debt consolidation loan is not available to everyone. You can find out more.
Alternatives to debt consolidation loan
A consolidation loan for debt is not right for everyone. Lenders may have higher eligibility requirements for debt consolidation loans than personal loans. The loans may not be sufficient to pay off the type of debt you want. Here are some options for debt consolidation loans:
- Balance Transfer Credit card: A balance transfer card lets you transfer debt from another credit card (usually credit cards from different companies only), or use a check to combine debts with one. Zero percent interest rate This promotional period usually lasts 12 to21 months. For approval, you must have good to excellent credit ratings. The standard card interest rate will apply to the balance after the introductory period ends. A majority of cards will also charge a balance transfer fee, usually 2-5%, on any amount transferred.
- Home equity loan or HELOC. Home equity loans or Home Equity Lines of Credit (HELOCs), allow you borrow against the equity of your home. The home equity loan will have fixed monthly payments with a fixed interest rate. A HELOC is more flexible and can be used as a credit card. While both can be used to consolidate high-interest debt, you could lose your home if it isn’t paid off. You will need equity in your house to qualify for both. HELOCs and home equity loans have a longer repayment period than debt consolidation loans. The loan amounts are larger and the interest rates lower.
- Refinancement of collection: Refinances with withdrawal are a replacement for your existing mortgage by a new one that is more than the outstanding balance. You can use the difference in the two balances to pay off your existing mortgage or consolidate debt. If you are unable to pay your loan, your home could be at risk.
- Debt Settlement: You negotiate with your lender to make the debt settle. You can either negotiate directly with the debtor, or pay a fee to a lawyer or debt settlement company to negotiate for you. Your credit score may be negatively affected by a successful settlement.
- Bankruptcy. Filing bankruptcy means going to federal court and having your debts discharged. It is possible to discharge personal, medical, and credit card debts through bankruptcy. However, it can be very difficult to pay student loans and tax debts. This alternative will cause a significant credit loss to your credit score. It may take several years for it to recover.
The bottom line
A debt consolidation loan to consolidate your high-interest debt may make financial sense, but it’s not the only option. There are alternatives that may be better in some cases. A home equity loan is a secured loan against your house that can be obtained at a lower rate.
But it’s important to be aware of the potential risks involved in choosing an alternative. Before proceeding, review the various options and compare the interest and repayment terms.