4 Types of Debt Consolidation Loan Options

The year has just begun and you probably want to progress without any additional debt. Perhaps you wish to get a hold of your finances this year and cut down on spending. If this is so, then you should consider looking for a debt management system.

Besides there being a big number of credit management service providers, it would be prudent if you’d consider debt consolidation. This is a debt refinancing process that involves taking up a big loan to pay off small outstanding loans and debts. This has been shown to be an effective consumer debt management system and is therefore common in personal finance institutions.

Debt consolidation loans make debts manageable since you will be servicing one loan rather than multiple small loans and debts that can slip off your mind when due. Often, there are lower rates charged on the debt consolidation loan compared to the average rate on the multiple debts.

So, do you think that debt consolidation is your way out of a financial crisis? Do you know the most preferable or suitable debt consolidation process? Here are the 4 main types of debt consolidation processes:

  1. Consolidation through a debt consolidation company

Statistics show that there is an ever increasing amount of consumer debt. To help many people in need of debt relief or management solutions resolve or manage this, there has been a subsequent rise in the number of companies offering personal finance solutions.

One of the solutions or services provided by such companies is debt consolidation. You will easily come across firms exclusively offering debt consolidation. What happens is that you will receive advice on debt management alongside the loan. The company often pays off your creditors then you are left with one loan owed to the company. This gets your creditors off your neck for good, as long as you don’t accumulate any more debt.

The reasons why you should consider this option is because the resultant (new) loan charges lower monthly repayment since they’re charged lower interest rates. This option often saves money at the end of the repayment period.  If your biggest challenge has been forgetting to pay loans on time, the debt consolidation loan leaves you with only one loan that you can’t forget thus avoids default penalties and late fees associated with forgetting some payments.

Unfortunately, you will not enjoy the lower interest rates on your consolidated loan if your credit rating is poor.

  1. Balance transfer consolidation

Say you have several accumulated credit card debts; wouldn’t you want to transfer all those debts into one card with zero interest rate chargeable? The balance transfer consolidation option is an effective way to clear your credit card’s negative balances if you are certain that you will change your lifestyle and spending, and if you are certain that you will have repaid the debts fully by the end of the zero-interest rate period.

Most companies offering balance transfers on credit card balances give between 6 and 18 months. During this period, you should be able to repay the balances. This is an affordable option compared to normal repayment of a high interest credit card loan. You will, however, pay a transfer fee that is often between 2-5%.

  1. Home Equity Line of Equity Loan (HELOC) Consolidation

A debt consolidation loan is either secured or unsecured. HELOC consolidation is an example of a secured debt consolidation loan. In this case, your home will be used as collateral for the loan borrowed. This solution is effective because you can get a loan of up to 80% the value of your home.

Unfortunately, they do not have fixed terms since the value of your property is somewhat determined by the market. There is no control over external factors in finance. By securing the loan against your home, you will enjoy lower interest rates on the loan. Even though this rate will vary, it will be lower nonetheless. The other downside of HELOC consolidation is that you risk losing your home if you default payment.

  1. Peer to Peer (P2P) consolidation

This is one of the new debt consolidation processes. This is an option that allows people to lend money to each other through P2P lending companies. The P2P companies connect you with people with money they are willing to invest. The investor gains through the favorable interest rate that is charged on your debt consolidation loan. Besides the returns on investments and interest on the money lent, lenders also get satisfaction from helping people in need.

Compared to the loan you will get from the bank or any other financial or credit institutions, P2P loans charge lower interests.

The market is filled with all these options though caution is crucial when shopping for a debt consolidation loan. Some of the precautions you must exercise include:

  • Steering clear of scams

Avoid highly aggressive sales agents advertising deals that are too good to be true. You should also not sign contracts with companies that ask for any form of deposit for registration. Trust your gut instincts.

  • Work with reputable companies

Reputable companies have been in the market for a long time and they will offer the best advice. The chances of the company disappearing with your money are less and you can hold someone responsible. Look out for reviews, comments, and complaints on the company website and review sites to know if a company is trustworthy.

  • Get credit counseling

The reason why you are in debt is probably poor financial management. Do not get to the end of the year with more debt on your back. Create a budget and stick with it. Live within your means.

In conclusion, attaining financial freedom is a challenging but achievable vision. Talk to your finance planner and determine your best debt consolidation process. Change your lifestyle and learn to live without any debt on your back. You should also undertake sufficient research before signing contracts. Follow the advice above and your financial freedom goal will come true at the end of the year.