debt consolidation loans

Debt Consolidation Loans Explained: 6 Things You Need to Know

Debt is a problem for many Americans. Especially now in the holiday season. So, what will you do when the holidays are over, and your credit card debt is piling up? Debt consolidation loans are a great way to combine your debt into one monthly payment, with less interest than you were paying on each credit card. It is a fix that will not only help you pay off your debt but save money in interest as well.

What Are Debt Consolidation Loans?

Debt Consolidation loans allow you to put most or all (depending on what funding or lines of credit you have available) of your debt onto one line of credit, or loan, to reduce interest and monthly payments. This option is available for you to save money on interest, pay less monthly, and pay off your debt in as few payments per month as possible.

What Kinds Of Debt Consolidation Loans Are Available?

There are various options to choose from depending on your situation.

Some of the available options you can look into:

-Refinance or Home Equity Line of Credit (HELOC)

-Balance Transfers

-Personal Loan

How Can A Refinance Or HELOC Help You?

If you are a homeowner and your mortgage is in good standing, you can use the equity you have in your home to cover a debt consolidation loan. Don’t worry if your credit is in bad shape because you have too much on your credit lines. Your mortgage company will consider that when approving you for a refinance.

You will have a better chance of being approved with a refinance if you agree to have the checks written directly to the credit card companies at closing. This is because it guarantees that you will use the money to consolidate your debt rather than spending it on other things.

What Is A Refinance?

Completing a refinance on your mortgage means you are taking out a new loan through a mortgage company and applying it to the old one to pay it off, plus whatever you are using the new funds for. Generally, you need to own the house for at least two years before you can refinance because you have to make the payments and build equity over time.

-Say you bought your house for $100K, and you have owned it for four years. It is now worth $4000K because the cost of housing has risen substantially since you purchased it. The bank will get whatever you owe on your current mortgage, and you will get to use the remainder of the money to pay off debt, pay medical bills, etc.

Once you are approved, you will set up closing, and the checks will be written directly to your mortgage company and all of the companies you have debt with. If you are not approved for enough to cover all of your debt, don’t worry, you can still pay off as much as you can, save on the interest for the accounts you can transfer, and use your savings to pay off the remaining balances along with the transfer.

What Is A HELOC?

A home equity line of credit (HELOC) is a line of credit from the equity you have on your home. If you don’t want to go through a refinance process, this is a good option because you will still pay less interest than you pay on your other lines of credit combined.

This option is limited because you have to own a home and have your mortgage in good standing, but it is a good option if it fits your needs. You will also want to have a clean credit history for this option because banks are not as forgiving about credit history as private lenders.

Another Important Factor To Remember For Both Refis and HELOCS Is

that you are putting your house on the line for this debt consolidation loan. Do your math and make sure your budget has room for each month’s payment.

Realistically, you are saving money because the payment will be built into your mortgage payment. It will be less than you were paying in total with all of your different minimums. Do your budget and proceed cautiously by making sure you know exactly how much you can afford to cover monthly.

How Can A Balance Transfer Help You?

A balance transfer is an opportunity provided by credit card companies. A balance transfer is an excellent option for a debt consolidation loan if you have high-interest revolving debt.

Depending on your financial situation, you may get offers in the mail from your bank and others to transfer your lines of credit to their line, for low to no interest, for a promotional period.

This will allow you to cut down on your minimums each month, how much interest you pay on your current lines of credit, and it will help simplify your bill process because you will have less to pay throughout the month.

Generally, as long as your lines of credit are in good standing, you will receive balance transfer offers. Your credit history will play a part in how much interest you will be charged and how much time you will have with the reduced rate before it goes up.

Make sure you plan out your payments to pay off the lines you transferred before the promotional period is over, or you will end up paying very high interest on that loan moving forward.

Is it too much to pay off before the promotional period is up? That’s ok as long as you are prepared and set up another balance transfer, if you can, to continue paying it off with little to no interest.

The downside with balance transfers is that it does not immediately help your credit like taking a loan out because the debt temporarily stays on your line of credit until it is paid off, but the upside is how much your credit score will go up when your debt is paid off! Can you get a better result than a clear path to financial freedom?

How Can A Personal Loan Help You?

We will discuss the last type of debt consolidation loan today is a personal loan. These loans are helpful because there are options from online lenders that are willing to work with you even if you have a lot of debt to consolidate.

These loans typically have a higher interest rate than the other options, but in most cases, it is still less than you are paying if you combine all of the interest payments you are making on multiple lines.

They are typically approved faster than traditional loans as well, so you will have the funding you need to help you cover not only your costs but also lower your costs.

So How Do You Decide If A Debt Consolidation Loan Is The Best Option For You?

In the end, all you can do is research to make sure you know what your options are and then make a choice based on what fits your financial situation. Choosing to apply for a debt consolidation loan can be very helpful if you choose the right option.

This post originally appeared on Savoteur.

Dana is a blogger with a master’s degree as a Literacy Specialist who has a long history of writing freelance articles for her blog, Debt Blogger, as well as writing for other companies and individuals who have needed content. She learned about finance and budgeting through her experience and years of tight budgeting and dealing with debt personally. Her professional and personal experience with sharing information and teaching others has made her blog a reliable source of information for those who want to improve their financial literacy skills.