Debt Consolidation – All You Need to Know

Debt consolidation refers to taking a new loan (or getting a balance transfer credit card) to pay off multiple loans or credit card debts so your repayments can become simpler (a single monthly payment as opposed to several payments every month).

In some cases, you can also get a lower interest rate on the new loan, if you have a high credit score. Here’s all you need to know about debt consolidation as a means to repay your debt.

Types of Debt Consolidation

Some of the ways through which you can consolidate your debts are:

– Balance transfer credit cards: These cards usually have a low or zero APR during the promotional period, so you can transfer your existing debts to the card and pay them off during the interest-free period.

– Debt consolidation loans: Lenders often offer “debt consolidation loans” which are unsecured personal loans specially designed for paying off debts. Consolidation loans usually have fixed interest rates.

– Student loan consolidation: These loans are specifically meant for consolidating multiple student loan balances into a single loan with a monthly repayment (this loan is typically available for private and federal loans).

– Home equity loans/lines of credit: These loans allow you to borrow up to 85% of your home’s equity, and repay the borrowed amount over time. A home equity line of credit (HELOC) is similar to a credit card as you have access to a certain amount of money whenever you want and you pay interest only on the money you actually borrow. However, home equity loans and HELOC require you to use your home as collateral. If you cannot pay your loan or line of credit, you could lose your home!

– Cash-out mortgage refinance: This allows you to get a new mortgage that’s more than what you owe on your first mortgage. The new mortgage pays off the old one and you get the difference through a cash-out.

Debt Consolidation Costs

Some fees associated with debt consolidation are:

– Balance transfer fees for credit cards (between 3% and 5%)

– Origination fees for personal loans

– Closing fees for mortgage-related loans and lines of credit

The best way to find the loan or line of credit with the lowest rate is by getting quotes from multiple lenders/creditors and comparing the fees.

With debt consolidation, it becomes easy to manage your expenses by combining multiple debts into a single monthly payment. However, a longer repayment period could cost more in interest, even with a lower rate.