A debt consolidation loan can provide you with much-needed relief from the stress of overwhelming debt. If you go online, you will find tons of debt consolidation loan advertisements. Not all are reputable and not all debt consolidation loans will help you improve your credit score. At the end of the day though, this is what you want—to improve your credit score and gain financial freedom.
According to statistics released by the Federal Reserve Bank this week, Americans owe more than $13 trillion! The Reserve Board says this is the highest level in history. The primary culprits are mortgages, which make up almost 67% of the total, followed by student loan debt, and credit card debt.
A debt consolidation loan combines your high-interest debt into a single loan at more favorable rates. With one bill to pay, you can more easily handle your monthly bills. A debt consolidation loan from a P2P lender is repaid via automatic monthly deductions from your bank account. This means you get out of debt sooner and improve your credit score more quickly.
Let’s take a deeper look into the paradigm of debt consolidation loans.
Types of Debt Consolidation Loans
1.Personal Debt Consolidation Loan
A personal loan to consolidate your debt can be obtained from a bank or peer-to-peer lender. To obtain an unsecured loan from the bank requires excellent credit. The average American consumer saddled with skyrocketing debt will not qualify for an unsecured loan from the bank. Fortunately, there is a better option.
A personal debt consolidation loan from a P2P lender allows you to consolidate all of your debt into one monthly bill. The interest rate is favorable, fees are low and you get rid of your debt in a timely fashion. Because the payments are deducted automatically, you don’t have to worry about forgetting and being late. Therefore, in addition to eliminating or lessening your debt, you will establish a good record of bill payment. At the end, you will be free of the debt and improve your credit score.
A credit card balance transfer moves all of your credit card debt to one lower interest rate credit card. Probably you have been inundated with balance transfer offers. Credit card carriers offer zero to low balance transfer rates, but there is an expiration period. It is vital to keep your eye on this date and to carefully read all of the fine print.
You can get rid of your credit card debt more quickly if you are dealing with a zero or low-interest rate. If you are diligent and committed to a debt-free life, a credit card transfer option may be perfect for you. BUT, if you go past the balance transfer period, normal interest rates kick in. Then you could find yourself just as encumbered as you were before.
Another thing to keep in mind is that a credit card balance transfer can negatively impact your credit score—the opposite of what you want to do. Why? Because when you have all your debt on one credit card, it will throw off your credit utilization score.
3. Home Equity Loan
If you have enough equity in your home and good credit, then you qualify for a home equity loan to consolidate your debt. The interest rate for these types of loans is pretty favorable. However, your home is now collateral. If something should happen, and you cannot make the loan payments, you could lose your home. For this reason, a home equity loan to consolidate your debt should be a very last resort.
Final Thoughts on Debt Consolidation Loans
A debt consolidation loan, regardless of the method you choose, can actually hurt you if it becomes a license to increase your spending. Being free of the monthly stress of bills you cannot pay can be a bit euphoric. Use that euphoria to set financial goals. Create a realistic budget. Open savings accounts for emergencies, retirement and long-term goals. Create a new future.