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How You Can Benefit From a Debt Consolidation Loan

July 21, 2009 | Credit Repair | Guest Post | Personal Loans | No Comments

Below is a guest post by Robin Williams.

A debt consolidation loan can combine your multiple debts into one loan, help you save money and handle your finances better.

It is quite easy to fall into a debt trap but it is always difficult to dig yourself out of it. If you have piled up a huge amount of high-interest debts and you’re finding it difficult to keep up with your monthly debt payments, one solution to lower them and get out of debt is a debt consolidation loan.

Why A Debt Consolidation Loan Is Beneficial for You

The idea behind a debt consolidation loan is simple. You are acquiring a new loan at a reduced rate than your present debts that frequently carry higher rates charged by retailers and credit card companies. Subsequently, you utilize the money to repay your existing debts. This leaves you with just one monthly payment rather than multiple payments. As the new loan is available at a reduced rate, you would also enjoy a reduced payment and it would be less than the aggregate of your earlier payments. This indicates that you can get out of debt faster.

An instance of how a debt consolidation loan works:

  • You are obliged to repay $4,000 for a store credit card that has an interest rate of 17.5% and monthly payment for this is $80.
  • Your bank credit card has an outstanding balance of $5,000 at an interest rate of 18.9% and monthly payment for this is $100.
  • You have a car loan of $15,000 of which $11,632 is outstanding at an interest rate of 6.97% and monthly payment for this is $359.
  • Your overall debt amount (not considering your mortgage) is $20,632 and your overall monthly debt payment is $539.
  • At this payment level, you’re not paying down your debts rapidly. To make things simpler, you obtain a 60-month home equity loan for the same amount ($20,632) at an interest rate of 7%. Your new monthly payment becomes $409.    
  • You can utilize this loan to repay your other creditors. With the considerably reduced interest rate, your new monthly payment amount is lower than your previous one by $130. Furthermore, your debt would be repaid in five years and the overall amount of interest payable by you is $3,880. This is less by $5,541 than what you would have paid for your original loans.


Utilizing A Line Of Credit Or Home Equity Loan

One popular form of debt consolidation loan is a line of credit or home equity loan. As the loan is guaranteed by your home equity, the lender can offer you a cheaper interest rate. The loan amount you can avail is dependent on the amount of equity you have. Usually, lenders would offer you an amount which is equivalent to 80% of your home equity.

The interest payable for a home equity loan might be tax deductible and this successfully lowers the loan costs. You can discuss about this with a tax consultant. Nevertheless, keep in mind that home equity loans require your home as collateral and in case of a default, you have the risk of losing your home.

Utilizing A Personal Loan

For consolidating your debts, lenders also provide personal loans. For this type of financing, it is hard to obtain an interest rate that is sufficient to better your condition, particularly if your credit score is less than adequate. If it is an unsecured personal loan, the interest rate would be more than a home equity loan. One technique to obtain improved terms and conditions is to have a friend or family member as a co-signer, assuring repayment.

Compare Loan Offers

Be cautious prior to signing the dotted line. For effectively lowering your debt, a debt consolidation loan must have an interest rate that is substantially lower than your existing rates. You should also know that your payments might be reduced by extending the repayment term but at the same time, this can result in increased interest cost. Verify if there are any commissions or additional charges along with needless costs like credit insurance.               

Rectify Your Spending Habits

It is essential to keep in mind that a debt consolidation loan would only be useful if you prevent accumulating new debt or else, you would land up in similar types of problems that you had in the past. A debt consolidation loan can help you get back on track. However, it would work if you select the correct loan and rectify your spending habits to stop piling up new debt.