Debt Consolidation Loans
When used correctly, debt consolidation can be a powerful way to help pay down debt. Combining multiple accounts into one lower-interest loan with one monthly payment can provide an important psychological and financial boost.
However, without a plan and a commitment to not accrue more debt, a consolidation loan could make matters worse by freeing up credit, increasing your capacity to overspend. To avoid this trap, it is critical that you break the debt cycle first by scrutinizing your spending and building a debt payoff plan to address the cause of consumer debt—before you consolidate your loans.
As you consider your options, keep in mind that each time you apply for a new loan or line of credit, your credit score can be affected. Too many applications can pull your score down. Some institutions allow you to check your interest rate without pulling your credit report, which won’t ding your credit. For those who do not, it is best to review the general terms first. Only allow a hard pull on your credit once you have narrowed your choice and are confident in the institution you want to apply with.
Here are several debt consolidation options.
However, without a plan and a commitment to not accrue more debt, a consolidation loan could make matters worse by freeing up credit, increasing your capacity to overspend. To avoid this trap, it is critical that you break the debt cycle first by scrutinizing your spending and building a debt payoff plan to address the cause of consumer debt—before you consolidate your loans.
As you consider your options, keep in mind that each time you apply for a new loan or line of credit, your credit score can be affected. Too many applications can pull your score down. Some institutions allow you to check your interest rate without pulling your credit report, which won’t ding your credit. For those who do not, it is best to review the general terms first. Only allow a hard pull on your credit once you have narrowed your choice and are confident in the institution you want to apply with.
Here are several debt consolidation options.
Home equity
Borrowing from the equity in your home can be an effective way to consolidate consumer and other high interest debt; however, it is a significant financial decision that should be considered carefully. Make sure you understand your options and the pros and cons of each.
Home equity loans (HELs) and home equity lines of credit (HELOCs) can be confused. The surest way to tell the difference is to ask if the interest rate is fixed for the life of the loan (HEL) or variable (HELOC) and if the loan is a line of credit available to withdraw from as needed during the draw period (HELOC) or if the funds are delivered up front and all at once, with no ability to draw after that (HEL).
A home equity loan could work well if interest rates are lower at the time of application and if a fixed amount is needed all at once. In higher interest rate environments, the HELOC could be a better choice if you are looking for a loan with a variable interest rate that could decline if interest rates go down.
A home equity loan could work well if interest rates are lower at the time of application and if a fixed amount is needed all at once. In higher interest rate environments, the HELOC could be a better choice if you are looking for a loan with a variable interest rate that could decline if interest rates go down.
Other loans
Conclusion
Whichever option you choose for debt consolidation, an iron-clad commitment to not accrue any new debt is critical. Make sure you have broken the debt cycle first to reduce the risk of falling deeper into debt once your accounts have been combined. This can allow you to use the fresh start a consolidation loan can provide to help you get out of debt and stay debt-free, a significant step on your path to lifelong financial security.
Know the difference
When dealing with debt, getting the right support can be extremely helpful, but it is critical to understand the differences among the services offered.
- Credit (or debt) counseling services are financial education organizations that focus on helping you set up debt payment plans and organize your finances. They can (when authorized) work with your creditors to try to negotiate lower interest rates and/or payments.
- Debt consolidation means you are working with a lender who will require you to apply for a loan. Loan proceeds are then used to consolidate multiple debts into one loan.
- Debt settlement companies do not lend you money; instead, they ask you to send them money which they will use to try and negotiate reduced payoffs on your debts. They will ask you to stop making payments on your debts and send them a monthly amount instead, which could lead to damaged credit.