These are some of the things that mind be going through your mind if you are struggling with debt problems. In the last article in this series, we listed out the basics of debt consolidation, its advantages and disadvantages. But do you know that there are different types of debt consolidation? Yes, it’s not just taking out a bigger loan to consolidate all your other smaller loans. Here are a few of them.
Secured debt consolidation loan – To get this loan, you have to provide some kind of collateral for the amount borrowed. You can put forward any asset that you have (e.g. your home or your car) as collateral in order to receive the loan. It is possible to borrow as much money as needed with this type of a loan because the loan is sanctioned on the basis of the collateral provided. This type of loan is also usually available at an interest rate lower than unsecured loans. However, one thing to keep in mind is that if the borrower is unable to pay up the loan at the end of the term of the loan, the debt consolidation company has the right to take over the assets you placed as collateral.
Unsecured debt consolidation loan – As you might have guessed by now, in an unsecured debt consolidation loan, no security or collateral is placed for the loan. Since there is no collateral taken as security for this type of loan, you may find that the debt consolidation company may not approve the exact amount of loan you apply for. They approve a lower amount so that they don’t have to incur much loss if you fail to repay the loan. Also, the interest on such a loan tends to be on the higher side. The obvious advantage is that you don’t have to worry about losing any assets if you find yourself in a situation where you are unable to pay back the loaned amount.
Home equity loan – This is actually a type of secured debt consolidation loan. A home equity loan is taken out using the equity in your home as collateral. You must have a major portion of ownership of your home to qualify for this loan. The pros and cons are similar typically that of a secured debt consolidation loan. If you default on payments or are unable to pay back the loan, you risk foreclosure. The interest on the loan is generally lower. This type of loan is advised only if you worked out a debt management plan and know for that certain that you will be able to pay back the loan.
Personal Loan – This loan is a type of unsecured loan that has fixed repayments over a fixed period of time. Though the amount approved for personal loans is usually not very large, if your debt is under manageable limits, you can use the personal loan as a debt consolidation loan. Once your personal loan is approved, you can use it to consolidate your debt. Your chances of approval for a personal loan depend on your credit score. If it is good, you shouldn’t have a problem. If it is bad, you may have to pay a higher rate of interest, or your loan may be rejected in entirety.
card balance transfers – A credit card balance transfer involves transfer all your credit card balances from different credit cards into a single card. If you opt for a credit card balance transfer under a special offer or promotion wherein you are offered a time limit lower interest rate, make sure you know after what time the original interest rates will be applicable again. You will also need to make sure that the card you are transferring the debt to has a large enough credit limit if you want to use a credit card balance transfer as a debt consolidation loan. If you do it right, it might actually lead to a better credit score, because having one card with bigger balance and higher credit limit is better than having several maxed out cards with smaller credit limits.