A debt consolidation loan is basically a loan you take out at a lower interest rate to pay off one or more other loans that you have that are at higher interest rates. Now it’s called debt consolidation because it is generally more than one loan. So, say you have credit card debt and you have, you know, some other types of debt that are at higher interest rates you take a debt consolidation loan at a lower interest rate, you pay off those other ones, and then you end up with a single payment that you are paying less interest on. So a debt consolidation loan is not necessarily one sort of loan; it’s really any loan that you take out at a lower interest rate to pay a higher interest rate debt that you already have. So a debt consolidation loan may be a home equity loan or line of credit. It could be a personal loan from a bank. It could be something as simple as, you know, moving your debt from multiple high interest rate credit cards to a lower interest rate credit card or even moving into a credit card that has a 0% offer for a little while you transfer your balances so any of those could be considered a debt consolidation loan. So when you hear that that name, there’s not just one type of loan that is consolidation.
Now when you take out a debt consolidation loan, there may be origination fees, there may be annual fees, so that’s something that you need to look at and make sure you’re not paying too much in fees with the hope of paying less in interest. But that’s not necessarily a huge thing to worry about. It’s not often that you’re going to pay really high fees. What you really need to worry about is to make sure that when you consolidate your debt, you’re not just. you want the lower interest rate, but you don’t want to stretch out your payments further and further when you get that low-interest rate so that it feels like you’re paying less each month but really you are extending your payments so that your loan period is longer and you may end up paying even more interest over the long haul even though the interest rate is less. So you want to make sure that you are kind of doing this the right way. you’re getting that interest rate down, but you’re not, you know, you’re not changing the terms of these loans in a way that you’re going to be paying forever and you’re going to be paying even more over the long term and that also is something you need to think about in terms of, if you consolidate that debt, and you have one new payment and a lower rate, your payment is less you also have to think psychologically that you aren’t going to take on any more debt, that this is really a strategy you’re using to pay less interest and really that’s it. It is not.
You don’t want to get into another place where you’re taking on new debt. So if you are taking out a debt consolidation loan, there are sort of two types and one of them is what you call a secured loan and that is probably most commonly when you think of a home equity loan. You have equity in your home; you are taking out a loan sort of against that equity in your home. The good thing about these types of loans is that the interest rates are often lower and they’re easier to qualify for because you have collateral. The downside to a home equity loan or another secured loan that you may be using collateral with that because you put up collateral, if you don’t pay it, you are putting potentially your home or other property in danger if that doesn’t get paid. So the other type of loan is more of a personal loan or the balance transfer on a credit card. These are unsecured loans that may have little higher interest rate but still, you know, hopefully, less than what you’re paying for your current loans. But they can be harder to qualify for because they are unsecured. That means there is no collateral, so you have to have a good credit rating in most cases to qualify for those types of loans.
If you have bad credit and you have high-interest rates there’s no real incentive for a bank or other financial institution to give you a loan that allows you to consolidate that debt. So like I said before, if the debt isn’t too big or if it’s, you know, mostly credit card debt, you have the option to use what is called a balance transfer on your credit cards. You find a new credit card that you can qualify for and oftentimes there is a temporary 0% interest rate that you might get, and then the card itself may even have a lower interest rate after that 0% period is over. Really all you do is you move the debt from one credit card to another and in many cases, well I shouldn’t say in many cases. In some cases, you can actually move that credit card debt without paying any sort of fees the Chase Slate and Bank of America Bank, America. Those both offer balance transfers with no fee. So, you know, you can park your money for fifteen months with both of those and it’s almost like debt consolidation right there you’re taking that higher interest debt, you’re parking it for a while at a zero percent rate, and hopefully after that your rate is still lower than what you’re paying now.
So that’s definitely something to look into. The last point really just does your research. There are reputable banks that offer loans that allow you to consolidate your debt, but there are also a lot of, you know, sort of bottom feeders out there who are looking for people that are in financial straits who will tell you they can consolidate your debt and they may be able to consolidate your debt but oftentimes they are the ones. They’re going to say we’ll lower your monthly payments but they’re going to stretch those payments out for much longer and you’re going to pay more interest over the long haul. So the goal here is to pay down your debt, it’s not just to extend it forever, right?