A debt consolidation loan is a way to manage someone’s debt by paying off the debt or making an arrangement with a creditor. There are three different ways to consolidate a loan.
Debt consolidation companies
These companies help lower your balance and reduce your payment by negotiating with your creditor. They can find a way to get rid of some of your late fees. They can also negotiate so that you could settle your account for less than what you owed.
Debt consolidation companies do this by putting you on DMP (Debt Management Plan), debt negotiation plan, or debt settlement. They base this upon your monthly earnings and expenses. Through this plan, you’d be able to pay off those debts that negatively affect your credit score. This is a great option for those who have bad credit and can’t qualify for a debt consolidation loan.
For those with good credit or those that have an asset to use as collateral, getting a debt consolidation loan or home equity loan could be the options that your debt consolidator would advise you to get. Your debt consolidator would help in determining if getting that loan would help you save money.
Debt consolidation loan
There are two types of debt consolidation loan – secured and unsecured. If your loan requires an asset to use as collateral, that’s a secured loan. If it’s based only on your credit score, income, and your ability to pay and does not require collateral, that’s an unsecured loan.
Private lenders, credit unions, and banks usually offer debt consolidation loans. Banks and credit unions, typically, offer a lower interest rate. However, if your credit score is low, you might find it hard to get approved. Or if they approve your application, they may require a co-signer or collateral.
Aside from these traditional lenders, peer-to-peer lending is another option that’s available online. This is done through crowdfunding online. Typically, these websites set a minimum credit rating to get approved. Other than that, they also have a high interest rate.
Home equity loan for debt consolidation
For those who have their own home and equity, the home equity loan is another option to considering in doing debt consolidation. This would work for those whose equity is enough to cover their debts and have a good credit record.
Just like any other mortgage, your income, credit score, the debt amount, the value of the property, and the amount that you owe your current mortgage will matter. If your credit rating is low, you have too much debt, or you have late payments, your application may still get approved. However, most likely, this will result in a high-interest rate.
