Debt consolidation loans are becoming a more widely discussed solution for lessening debt, whether it’s a debt incurred from credit card usage, education loans, and medical emergency expenses. If you are currently having trouble with your debt of any kind, applying for a debt consolidation loan is your best choice to settle your problem. There are many different types of debt consolidation loan programs that you can choose from such as personal loans, credit card balance transfers, and lines of credit or home equity loans. Each loan has its own set of advantages and disadvantages, and you must weigh them all to see which is best suited for your needs.

How Does a Debt Consolidation Loan Work?

A debt consolidation loan is very simple and easy to understand. You obtain a loan and use the money to pay off your outstanding debt. You can pay off your debt consolidation loan in accordance with the pre-determined monthly repayment term. As previously stated, everything is really easy to understand. There’s more about debt consolation loans and now, let’s explore a little deeper.

How To Choose the Best Debt Consolidation Loan?

There are many different types of debt consolidation loan programs that you can choose from such as personal loans, credit card balance transfers, and lines of credit or home equity loans. Each one has its advantages. Here’s a basic rundown of each loan:

Personal Loan

These are the simplest loan to work for and you can easily get approved since the marketplace lenders now are popping up all over the place (making it even easier to find competitive rates). Due to the abundance of lenders available today, an individual can search around for deals, receive a price quote without affecting their credit, and compare quotes from various lender companies in the comfort of their own homes.

Credit Card Balance Transfer

This can be a great alternative if you obtain a credit card that offers a 0% introductory offer to transfer the balances of your other credit cards to the new one. These introductory offers sometimes bait and switch that makes you pay a greater interest rate instead, so you need to be extra careful when getting one.

Home Equity Loan

Home Equity is when you borrow money that is equivalent to the amount of your home. Since you already own the house, a higher chance of loan approval with a lower interest rate is possible. In addition, you can reduce the interest. However, the main downside of this type of loan is that you are using your property as collateral, which means that if something goes wrong, you will be thrown out of your house and home.

Choosing The Best Loan

What type of debt consolidation loan is best for you? It depends on your situation and your needs. Choosing the best loan for you is determined by several factors which include the kind of debt you presently have, the status of your credit score, and whether or not you have a consigner with you.

The most important factor to consider is the interest rate that the lender will charge you for your debt consolidation loan. Please bear in mind that your main goal is to lower your overall and/or monthly payments by getting a loan with a lower interest rate. Make sure that the loan comes with a lower interest rate before you sign the contract. Have trouble dealing with numbers? Here is a simple illustration of how crucial interest rates are in your entire debt repayment plan.

Let us assume that your credit card loan has been approved. When you go shopping, you will use your credit card to pay for the items you purchased or the services you received. Yes, you have received the items or the services but you have not paid anything yet. In that sense, the credit card provider has made the payment. Then, the credit card provider will send you a bill at the end of the month, indicating how much you owe them. Credit card companies make money by charging you interest on the money you use to purchase an item. The higher the interest rate, the higher you will pay and the more money they get from you.

Credit card providers are even wiser now because they will advise you not to pay your balance in full right away. Instead, they will advise you to pay the minimum amount only that is due every month, with the remaining balance being carried over to the next month. Why is this so clever? Because you will pay interest on every dollar you maintain in your account. The more money you have stored in your account, the more interest you will pay. So, for example, if you have a $500 with a 15% interest rate, you will be paying $75 as interest payments. If you carry over the $450 to the next month, you will be charged on the interest of the $450 (or $67.50) the next month. And it will continue until you have paid off your entire bill.

*This is a simple illustration just to show you how interest payments work in a very basic way; exact figures may vary due to different factors.

It is comforting to know that reducing a few percentage points off your interest rate can cut years off your debt payback plan.

Getting Out of Debt is Now Possible

While debt is a typical occurrence in today’s market, it does not mean that it is your fate. Debt consolidation loans can greatly help you in getting out of this trouble. Personal loans have the most flexibility, which makes them a great choice for debt consolidation. These loans are easy to be approved for, they also give you the freedom to use the money as you pleased, and it comes with a lower interest rate. Start comparing deals and offers now and get your own financial freedom.