Best Types of Loans for Consolidation

Personal loans for consolidation are often considered by many people who are struggling with bills they can’t pay as a viable option for debt relief. It can help make your debt payments easier by allowing you to combine all your high interest rate debts into one loan with a lower interest rate. The better terms lower your monthly payment and make it affordable to pay off your monthly bills.

There are several kinds of loans you can take to consolidate debt. Every option carries its own price tag and it’s best that you understand the risks involved for each one before you choose the method that works best for you.

Unsecured or Secured Loans

When you make a secured loan, the lender will require you to provide some asset as collateral on the loan. This can be your car or home or another property or other valuable possessions that the lender can easily convert to cash in the event that you fail to make payments on the loan. Unsecured loans do not require any collateral, but they typically have higher interest rates and come with hefty penalties if you default on payments.

Credit Card Balance Transfers

Many credit card companies offer promotional rates with zero or low-percent interest on balance transfers. If you decide to avail of a balance transfer offer to repay credit card debt, you would transfer several or all your outstanding credit card balances onto a single credit card that has a low interest rate. There are some things you must make sure you do to make this option work for you:

1. Be aware of the expiry date. The low interest rate is only offered for a certain period of time, and once the date lapses the regular interest rate will immediately go into effect.
2. Use a credit card with a large enough credit limit to hold all your high-interest credit card debt.
3. Take into account any additional charges, such as a transfer fee which can usually be around 3% of the total balance.

Personal Debt Consolidation Loans

The one advantage of taking out a personal loan is that you can arrange to make fixed payments over a fixed period of time. If you are not sure that you can pay up all your debts using a credit card balance transfer before the expiry date of the promotional late-interest rate, then it is better to make a personal loan to pay off your debt than do a balance transfer. If you avail of a personal loan, make sure you get a low interest rate than what you are paying on your existing debt and that you pay the loan out in the shortest time possible.

Home Equity Loans

Another way to consolidate your debt is to use the equity in your home as collateral. If you have a high credit score and enough equity in your home, you can avail of a home equity loan with one of the lowest interest rates possible. The biggest drawback is that you put your home on the line and in the event that you stop making payments on the loan, you can face the risk of foreclosure on your home.

For some people, taking on these types of loans for consolidation may be the best way to get out of a severe debt problem. Whether it will work for you really depends on your financial situation. Consult with a debt professional such as a credit counselor or a licensed insolvency trustee to help you figure out if any of these strategies is a suitable option you can take to pay off your debts.