The Four Different Kinds of Debt Consolidation Loan: Which One is Right for You?

You are nose-deep in debts. You have student loans, automobile loans, and credit card debts to pay off. The minimum payments are just not cutting it anymore. Every month you are incurring more debt just trying to make ends meet. What do you do?

which debt consolidation loan is right for youSadly, this is the present picture of adulthood. The average American citizen juggles at least three debt payments at a time, and credit card debt is one of the costliest of them. Paying off debt to attain financial freedom is next to impossible in such situations. The only way you can salvage your finances is by reducing the net monthly payment, but is that at all possible? Is there a way you can reduce your monthly dues without attracting a penalty and a higher APR?

What is a feasible way out of crippling debt and confounding payments?

Debt consolidation helps people pay off their existing loans and streamline their finances. It refers to a complete collation of all existing smaller debts. Debt consolidation is not synonymous with debt settlement, and it does not involve bargaining with the creditors and loan companies. You can combine your payday loans, medical bills, insurance bills, utility bills, credit card bills and personal creditor payments. It can take a little bit of time and effort since people usually make several payments throughout the month. Combining your debts will help you to lower your net monthly payoff and make it much easier for you to make ends meet.

Here are the top 4 ways people choose to pay off their consolidated debts –

Debt consolidation loans

You can approach debt consolidation company and borrow a sum that covers the total debt amount to pay off the existing creditors. You can then pay the consolidation company in much smaller payments that do not harm your personal finance.

Several banks and credit unions offer consolidation loans. However, you need reliable credit records and a score of at least 600 to qualify for consolidation loans from banks. Since you are already facing trouble making regular payments, it is safe to assume that the credit score is far from perfect. In such cases, you can always try the online debt consolidation companies like

Always remember that you can settle for lower monthly payments by stretching the repayment period. A more extended repayment period means that you will be paying more in interest. Also, pick a company that is ready to offer you lower interest rates. Your ultimate aim is to reduce your monthly payments, and unless your consolidation loan payments are lower than the current net amount, there is no point in switching to a new debt system.

Personal loans

Personal loans are not as easy to get, but you can always use one as a consolidation loan. Getting personal loans from banks can be a little tricky when you already have unpaid dues, especially from similar financial institutions. Not having a good credit score will also decrease your chances of getting a personal loan.

The amount you get from your bank will depend upon your FICO score. Since it is an unsecured loan or a loan without collateral, banks will run a thorough background check on your finances before sanctioning the loan. A bad credit record can attract higher interest rates. Higher interest on personal loans can help you consolidate your loans and pay them off, but it will not help you save money.

Home equity loans

You can use the equity in your home as collateral to take out a loan. You need a decent credit score and the right amount of capital for qualifying. Home equity loans have much lower interest rates, but they have much higher risks. Think of it this way. To pay off your credit card debts and student loans, you are now putting your home at stake.

Your home is probably your first significant investment. You should not risk the foreclosure of your home for a couple of lapsed payments. Using home equity loan as debt consolidation loan is a feasible idea, but it is never advisable. Finance experts always advice against using homes as collaterals for taking out any form of a consolidation loan.

Credit card balance transfers

The first thing you need to know is that there is nothing called a 0% interest credit card! There are low balance transfer rates, but they expire after a few initial months. Within six months to a year, you will be paying full interest. While transferring, ensure that you know about the ongoing rates and the expiration dates of the same. Credit card balance transfer can be costly for those who do not know the way around the finance avenue.

Credit card debt transfer is possible, but you need a card with a large credit limit to hold your credit card debt. However, know that once you transfer the sum, you also accept a blotch on your credit score. Your credit record will take a hit, and it will take at least a good couple of months of regular payment for recovery. As you keep paying the balance, your score will slowly but steadily improve.

Choosing the type of payment is not as difficult as it may seem, especially if you have an expert to help you through the process. Judge your present FICO score, your savings status and the equity in your home before you make a decision. What works for your parents or your best friend might not work for you. Debt consolidation is a personalized solution, and it cannot be the same for everyone. After opting for a debt consolidation loan, remember that it is not a long-term solution to your financial woes. It is just a temporary boost. Think of it as a bridge that can pick you up and carry you across the rapids to a safe zone. However, if you keep spending without measure and keep lapsing your payments, you will again end up in nose deep debt before you know it. Avoid borrowing until you have successfully paid off your loans.

Debt Consolidation FAQs to Help You Decide If Is Right for You

For people who are deeply mired in debt, debt consolidation is often suggested as a practical and viable way of sorting out their financial mess. However, there are a number of aspects that you need to consider to establish if debt consolidation is the right route for you. Some common questions:

How Does Debt Consolidation Help?

Debt consolidation can have a number of benefits for you; you can manage your finances better as due to the debt restructuring possible, the monthly payment can go down to an affordable level, you no longer have to monitor multiple debts, and you can get a longer tenor to pay off your debt. As a result, your stress levels can go down and you can enjoy a good night’s sleep.

What Are the Advantages of Debt Consolidation?

There are innumerable ways by which you can accumulate debt; credit card bills, medical expenses, cash advances, and payday loans represent some of the most common ways you can run up debt that can prove to be very difficult to manage. By opting for a debt consolidation plan that you can afford comfortably, you can ensure that your debts are serviced properly and you are able to save something by the end of every month. To ensure that you are not wasting your precious money, you should identify a debt consolidation company that does not charge any signup or registration fees. Referring to online debt consolidation reviews is a good way of doing that. Opting for an ethical debt consolidation company can get you access to expert and unbiased advice on how to best manage your finances and save you from filing for bankruptcy that can end up ruining your credit score for a very long time.

How Much Can Be Saved By Consolidating Credit Card Debt

Credit card issuers are infamous for charging extremely steep interest rates on credit card outstanding. It is quite possible to save a few thousand dollars on interest expense if you can consolidate $25,000 in credit card debt and pay it off with a personal loan in about 24-48 months’ time. This is possible because usually there is a huge difference in the interest rates between credit cards and personal loans.

Is a Debt Consolidation Loan a Better Option?

While you may be tempted to move credit card debt from one credit card to another to take advantage of a lower rate of interest, you will find out that when compared to a debt consolidation loan, the interest rates charged are still very high. Also, credit card companies have the habit of keeping on changing the APR periodically, so you may find the advantage of the low-interest rate disappearing just after a few months. However, to qualify for a debt consolidation at a good rate of interest, you need to have a good credit score, which may not be possible if you have let things slide and missed a payment or two on your credit cards. Also, having swept all your credit card debt into a debt consolidation loan, there is always the temptation to go wild with your credit cards and rack up huge dues again.

How Does Debt Consolidation Affect My Credit Score?

Maintaining a good credit score is extremely important because the ability to take on future debt depends on how high it is. However, often it can become very difficult for you to service credit card dues when they are attracting interest that is as high as 30% and it is natural for you to miss a payment to two, and this is bound to negatively impact your credit score. If you have maxed out your credit cards and take on a debt consolidation loan to settle all the outstanding, it can only positively affect your credit score. However, you should be careful that if the company you approach settles your credit card dues with the card companies for less than the full balance, there will be a negative impact on your credit score for some time.


Debt consolidation can be a very effective way of getting out of a debt trap because of its inherent advantages of being able to take on a loan at a lesser rate of interest as well as the opportunity of being able to restructure the loan tenor to suit affordability and budget.

Author bio: Graham Sheldon is an experienced personal finance consultant working for a leading debt relief company. Graham has also compiled a number of debt consolidation reviews that are a valuable resource for individuals looking for reliable agencies.

Why Is Debt Consolidation Loan The Most Favored Option Of Those Looking To Turn Their Finances Around?

A majority of us see our credit cards as conduits of a better lifestyle. We treat them as keys of spending habits beyond our current financial means. While our credit cards are swapped we forget that we are the ones who will have to pay the bills and at the end of the year we are stuck with debilitating loans that eat their way into our family finances and credit scores.

In most of the cases we have seen, the burden of multiple credit card debts and other utility bills becomes too overwhelming for families to bear. In such a befuddling financial turmoil most families end up opting for payday loans and 0% balance transfer credit cards. While they do seem helpful, they do nothing but add to the financial burden.

So what is the more financially friendly option?

A friendlier option is debt reconciliation. This merges all your current debts, including your credit card debts and outstanding loan payments, into one. Debt consolidation makes your existing financial situation much more manageable. And in all probability (if you are borrowing the money from the right source), you will end up paying an interest rate that is much lower than the rates you were paying on your multiple credit cards.

We especially recommend debt consolidation loan for those who are standing at the lower end of a good credit score. An existing credit card debt visibly dents your current credit score. When you go for debt consolidation you will automatically be transferring your credit card debts to an installment column that will not interfere with your credit score.

What are the currently existing debt reconciliation options?

Ringing up a debt consolidation company is one of the best things you can do when you find yourself in a sticky financial situation. Although many of these companies are out there to make profit out of the existing finance system, most of their policies are really helpful when it comes to helping people out of a bottomless pit of debts.

Here are the few kinds of debt relief companies that you will come across while looking for debt reconciliation online–

  1. Debt Reconciliation/Consolidation Companies – these are the true helpers during high financial stress. They will lend you money irrespective of the status of your credit score. In most cases the money is loaned out as unsecured personal loans that can be used to pay off all debts, outstanding bills and individual money lenders. After taking out a reconciliation loan you will have to manage just one debt with a fairly low interest rate. We have seen people pay off consolidation debts within terms of 2 to 5 years, with as low as 8% interest.
  2. Debt Management Companies – these are not true debt reconciliation companies. In fact, while looking for debt consolidation, this is one kind of company you need to steer clear of. They work with the lenders you owe money to and they try to negotiate lower interest rates. Although they are authorized and require legal fees, they are hardly ever successful in bringing down the rates and the payments without affecting your credit score.
  • Debt Settlement Companies – they are quite similar to the debt management companies. They work with the lenders as well to help negotiate a lower interest rate and lesser principal payment. Since they deal with the credit card companies and your bank directly, they run a high risk of permanently damaging your credit record in exchange of getting marginally lower interest rates. And did we mention? They charge a handsome fee irrespective of the final outcome of the negotiations.

As you can understand not everything is hunky-dory once you start looking at debt reconciliation options. As a matter of fact, the last two kinds of companies mentioned in the previous section barely make it to the category of straight debt consolidation companies.

While looking for debt reconciliation options and consolidation loans you should conduct a thorough background check on each and every potential option you have. Since testimonies and client feedback are not an option for most debt consolidation companies, you will need to rely on a number of registered website reviews. Do not forget to check official websites, government registered websites and Better Business Bureau before signing any contract with the companies.

What are the mistakes that can further ruin your finances after you get a debt consolidation loan?

Debt consolidation loan is not your key out to financial freedom. You cannot hope to get out of all your debts for good with debt consolidation loans, since you are just transitioning from one kind of loan to another. You may have to pay a lower interest rate on consolidation loans, but you will still have to pay the principal amount.

In case you are hoping to fall back on your credit cards after you are done paying the previous credit card debts, it won’t be long till you find yourself under a mountain of unpaid bills and defaulter’s notices once again. You will be plagued by terrible credit scores that will disqualify you from getting any further loans from registered banks and credit unions. Getting out of a financial fiasco takes a certain level of commitment where you should keep yourself from using your credit cards at every excuse.

So unless you are ready to cut up your credit cards, device a practical budget and are ready to live within your means you should not be applying for a debt consolidation loan right now.

Conclusion –

Debt consolidation is not the best option always, but it is also the only option for most with bad credit records and a cornucopia of unpaid debts. At the end of the day, it is definitely a relief to know that all your credit card bills and other minor loans are paid off and you are paying a much lower interest rate. If you follow a structured spending plan and enforce restraint on your spending habits, debt consolidation can definitely become the fastest vehicle to lead you to a debt-free life.

9 Factors to Consider Before Taking A Debt Consolidation Loan

The current state of the economy has affected many individuals. Even though debt feels like a norm, it is a real pain when you walk around knowing that you owe money to many creditors. When trying to manage your finances, it is easy to accumulate debt especially when you use high interest credit cards. At the end of it all, you will find that you are unable to manage your finances and with a high number of bills payable monthly, it is easy to fall behind on some payments or to forget other payments.

With time, you will have a bad credit and managing that is more difficult. Fortunately, debt consolidation is there to help you manage your debts and finances as well. Debt consolidation involves consolidating all your loans into one loan, paying off the creditors and then you are left with one loan to service. Often, debt consolidation loans have lower interest rates and they are manageable.

However, even with the reduced monthly repayment rates, you should reconsider your decision and re-evaluate the packages offered by different service providers. As you do this, keep the following considerations in mind especially when you have bad credit. These considerations include:

  1. Loan repayment term

You have to look at the time it will take you to repay your new loan. If the duration offered is long, you will find that your monthly repayment rates will be lower. However, there is a catch, the low monthly repayment rates spread over a long duration increases the total amount payable later due to the high interest rates. Ensure that the monthly payment rates are manageable for you but affordable in the end.

  1. Interest rates

There are fixed and variable interest rates for debt consolidation loans. The variable interest rates for the loan are definitely flexible but the fluctuation in rates may affect your ability to repay in some months when the rates are too high. Variable interest rates are affected by the market and you cannot predict how much you will pay.

A fixed interest rate on the other hand is effective when you are looking for a system that will make it possible for you to reorganize your finances, plan well, and stick to the created budget. Your intentions should be clear when taking the loan so as to determine your best way to better finance management.

  1. Type of loan

There are two types of debt consolidation loans that will be introduced to you as you look for a debt consolidation plan. These are the secured and the unsecured loans. The unsecured loan is the best when you do not have a home or you do but you aren’t willing to put your home at risk. However, if you are looking for debt consolidation for bad credit, then the only option and the loan availed to you will be a secured loan especially if you own a home. This however puts your home at risk especially when you have to repay the loan for a long time.

  1. Use of credit cards to transfer credit

Is the highest percentage of your debt made of accrued credit card debts? Talk to your financial consultant or the institution you transact with for transfer of your credit card debt balances into one credit card. This will give you one loan to repay monthly.

In other cases, you can get a 0% interest rate for the credit cards balance transfers. Though this is limited for a few months, it is appropriate if you know that you can repay the debt within that time. Unfortunately, most institutions decline this arrangement for persons with bad credit.

  1. Amount to borrow

The amount that you will borrow for debt consolidation will affect the type of loan available for you and the interest rates charged and the available packages are limited if your credit is in bad shape.

Note that you will pay a higher interest if you make the mistake of borrowing more than you need or more than the cost of your debt. To be safe, calculate the exact amount needed for the debts to be covered fully. You may talk to a credit counsellor or a personal banker if you are unable to compute the values as it should be done.

  1. Fees

You should be aware of arrangement and transaction fees. How will the fees affect the total repayable amount? Ask for information on the cost of the arrangement, setting up the loan, phone call costs, and any other charged fees. Include these costs to the total amount that you will be repaying monthly.

Some of your banks may charge you for repaying your loan before term. Will you afford the charges and will the total repayable amount for the debt consolidation loan be too high.

  1. What is out there?

If you have bad credit, your loan choices will be limited. The interest rates advertised by debt consolidation companies aren’t applicable to your bad credit case and the rates put are the Annual Percentage Rates. Call the companies to know the loans available for you and compare the interest rates available. Go for your best case rate after considering the repayment rates.

  1. Your eligibility

You aren’t guaranteed a debt consolidation loan just because you have too many creditors to repay monthly or because you keep forgetting some repayments. You have to keep in mind your age, your income, the frequency or regularity of your income, and your residence.

If you have poor credit, then the search will be longer. Not all debt consolidation loan companies extend the service to individuals with low or poor credit. These details are important because they show if you will be able to repay the new loan or not.

  1. The debts

Education loans from private institutions may not be approved for debt consolidation. Personal loans, government student loans, credit card debts, rates, outstanding bills, and tax debt will be consolidated.

In conclusion, the debt consolidation platform is there to ensure that you manage your funds and get rid of unnecessary debt. You should ensure that you only take a debt consolidation loan when you are ready to change your lifestyle and manage your finances.