The short answer to this question is that yes, a debt consolidation loan can be a good idea. However, for a debt consolidation loan to make sense, you have to have multiple debts such as credit card debts, a personal loan, medical bills and so forth. Not to mention good credit to get a low consolidation loan rate.
Why it can help
There are several reasons why a debt consolidation loan might make sense for you. For one thing, it will make it far easier for you to pay your debts because you will have consolidated everything into one loan and will need to make only one payment a month. Second, you will have a lower monthly payment. This is because you will have more time to pay off those debts. While you might need to pay off your other debts in just two to three years, you should have as many as five to seven years to pay off a debt consolidation loan.
The two kinds of debt consolidation loans
The two kinds of these loans are unsecured and.The secured type of debt consolidation loan is one where you pledge an asset such as your home as collateral. In comparison, with an unsecured loan, you are not required to have any collateral. This type of loan is basically what’s called a signature loan.
The two most common types of secured loans
The types of secured loans that most people get to consolidate their debts are a second mortgage or what’s called a refi. The difference between the two is that a second mortgage is just that–another mortgage on top of your first mortgage. A refi or refinance mortgage is when you pay off your current mortgage and start all over with a new one.
You need to have equity
The one downside to either a second mortgage or a refi is that you have to have enough equity in your house to cover the amount of money you want to borrow. In other words, if you need $10,000 to pay off your current debts, you will need to have at least $10,000 in equity, which is the difference between what you owe on your house and what it’s worth.
The downsides of a debt consolidation loan
The biggest con or downside of a debt consolidation loan is that it will take so much longer to pay it off. If you were to choose a seven-year loan, by the time you got to the fifth year you might have almost forgotten why you got the loan in the first place. Plus, you have to be very careful about not piling up a lot of new debts during that five to seven years or you could end up in worse financial trouble than when you started.
You also have to get approved for a low enough rate for the new loan to make sense. If you have average credit scores you cannot expect to get a 10% APR or lower. You don’t want to consolidate at a similar rate to what you are paying now. You can check out free debt consolidation calculators to make sure it makes sense to even think about consolidating with a loan.
You can also give us a call and get a free debt relief quote to see how much you can save on your debts without a loan.