Debt consolidation is the act of paying all your debts with either a new debt loan or debt consolidation credit card in order to have a single, consolidated payment at a low interest rate. The process of combining debt using a debt consolidation loan entails applying for a debt consolidation loan and making regular monthly payments to the debt consolidation company. You can apply for an unsecured debt consolidation loan or a secured debt consolidation loan. The key difference to keep in mind is to make sure that you consolidate your debt to a lower interest rate to save money by reducing the amount of interest that you pay over the long term.
Consolidate the right way
The right way to take advantage of a debt consolidation loan is to arrange a debt consolidation loan with one monthly payment that is lower than your combined current payments. There are many lenders who specialize in providing debt consolidation loans, so you should be able to find one to work your financial situation and for a lower interest rate. Some lenders offer personal loans as well as credit cards to help you consolidate your existing debts. Make sure you can afford the new monthly payments so you can be on your way to be debt-free.
When you are paying off all of your debts through a debt consolidation loan, remember that you will no longer owe all of those separate creditors any money. Instead, you will be paying into a single loan that is being distributed to all of your creditors to be free and clear.
You may also want to check with your lender about getting a new mortgage for the loan. Many lenders offer a secured debt consolidation loan based on the equity in your real estate property. Almost always, the interest rate on a secured debt consolidation loan is lower than an unsecured one. This could save you hundreds or thousands of dollars over the life of your loan.
Keep your oldest credit card to retain your credit history
When you are consolidating your debts to a lower interest rate, it is important that you keep in mind that you must use the proceed to pay off all those credit cards that are owed. That means that you must have the discipline to cut up all your credit cards and make sure that they are paid off before you apply for another loan in the future. Another important factor to remember is that if you are consolidating all of your credit card debts, you must not close your oldest credit card. Your oldest credit card brings the most history to your credit score, so be prepared to pay it off in full but don’t use it until you have fully paid off your total debt.
Three Options of Debt Consolidation Loans
Many debt consolidation companies offer different methods of combining your debt. If you are considering debt consolidation, you should educate yourself on the various debt consolidation services available to you. This will help you make an informed decision.
First option: Home equity loan
One of the most popular ways of consolidating debt is through a debt consolidation mortgage loan. Debt consolidation mortgage loans are based on your credit rating, your ability to repay the debt, and the available equity in your real estate property. This type of debt consolidation can help you move forward with a much lower interest rate, which is why it is the most popular option. However, not everybody can qualify for this loan because the mortgage lender will have strict lending guidelines. You may wish to speak with a mortgage broker who has connections to multiple banks, credit unions, and private lenders to give you the best option for a debt consolidation mortgage loan.
Second option: Home equity line of credit
A second option for debt consolidation loans is to apply for a Home Equity Line Of Credit (HELOC). A HELOC is similar to a mortgage loan. You would borrow against the equity in your home in order to pay for certain expenses such as tuition. The advantage to a HELOC is that you do not need to re-apply to withdraw more funds from the already approved equity loan in your real state property. Although HELOCs do have a higher interest rate than the first option, they do offer a flexible way to access the equity in your property and saves you from paying any mortgage application or broker fee.
Third option: Balance transfer to lower interest credit card
The last option for debt consolidation is to transfer all of your balances onto one lower interest rate card. For example, you could transfer balances from a high-rate credit card to a lower interest rate card. A lot of people find by transferring balances to lower interest rate cards, you are able to save a considerable amount of money on interest costs. Although most cards require a balance transfer fee, it is a minimal fee compared to the savings you earn, and some can be free of transfer fees altogether.
Jermaine Hinds, Mortgage Broker
Jermaine Hinds is a licensed mortgage broker for mortgages across Canada.
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