As the name aptly suggests, it is the method of combining all your debts together. How this is done is by borrowing a loan, also known as debt consolidation loan, to repay off all existing unique debts you have. This also implies that you will only have one single, large, combined debt to repay. This makes accounting for all your financial obligations much easier. However, keep in mind though that the total amount of money you owe to various credit banks is not literally reduced.
Types Of Loans
Credit Card Balance Transfers
- Credit Card Balance Transfers
- Personal Loans
- Home Equity Loans
- Debt Consolidation Loans
Credit Card Balance Transfers
Basically, this method entails the transferring of various credit card balances all into a single credit card. The payments for the various credit cards will now only need to be paid for through this single credit card’s bill. The point of doing this is to choose a low balance transfer interest rates which will result in a total lower amount of interest charged per month which in turn results in less total credit card debt.
There is however an 'expiry' date for the low interest rate and you will have to repay this consolidated amount within the limited time frame, which if not adhered to will result in greater levels of interest rates once again.
Assuming you can pay up within the period, credit card balance transfers will benefit you greatly in terms of the lower interest rates. Keep in mind though that your credit score will be lowered as a result in increased outstanding card balance especially if you are not capable of paying.
Personal Loans
The level of interest rate for personal loans depends on your credit score/rating. The higher your rating, the lower the interest rate and vice versa. It is an unsecured loan, which is a type of loan given out based on your promise/obligation to return it, for which you have to pay fixed, definite payments over a certain fixed period of time.
Home Equity Loans
To qualify for home equity loans, you have to have a good, acceptable amount of equity in your home and therefore also decent credit rating. Interest rates using home equity loans are usually lower than other forms of loans. The main drawback of this type of loan will be that if payments becomes unaffordable, the status of your house will be in jeopardy.
Debt Consolidation Loans
There is however an 'expiry' date for the low interest rate and you will have to repay this consolidated amount within the limited time frame, which if not adhered to will result in greater levels of interest rates once again.
Assuming you can pay up within the period, credit card balance transfers will benefit you greatly in terms of the lower interest rates. Keep in mind though that your credit score will be lowered as a result in increased outstanding card balance especially if you are not capable of paying.
Personal Loans
The level of interest rate for personal loans depends on your credit score/rating. The higher your rating, the lower the interest rate and vice versa. It is an unsecured loan, which is a type of loan given out based on your promise/obligation to return it, for which you have to pay fixed, definite payments over a certain fixed period of time.
Home Equity Loans
To qualify for home equity loans, you have to have a good, acceptable amount of equity in your home and therefore also decent credit rating. Interest rates using home equity loans are usually lower than other forms of loans. The main drawback of this type of loan will be that if payments becomes unaffordable, the status of your house will be in jeopardy.
Debt Consolidation Loans
Such loans are offered by credit unions and banks. These loans work by consolidating your debts and should optimally offer a lower interest rate than the original, current one. They increase the repayment period, thereby also resulting in an effect like 'spreading of overheads' and your financial obligations per month will thus be reduced.