4 Types of Debt Consolidation Loans

Debt consolidation usually involves taking out one a single low interest loan to pay off the other high interest rate debts.  Combining all debts under the umbrella of a single low interest loan reduces your monthly payments and makes your monthly bills more affordable.  It reduces the combined burden of all your debts and helps you get your finances back under control.  There are different kinds of loans that you can take out in order to consolidate your debt.

Home Equity Loans

A debt consolidation loans, more often than not, is a secured loan.  A lender gives a debt consolidation loan when you provide the security of an asset as a collateral.  In the case of a home equity loan you use the equity in your home as collateral.  Typically you must have a fair amount of equity in your home as well as a good credit rating to qualify for a home equity loan.  Taking out a home equity loan in order to consolidate your debts is a decision that must be taken after careful consideration.  When you take alone on the equity on your home in order to pay off unsecured debts you are putting your home on the line.  If any time in the future it becomes on manageable for you to pay the home equity loan, the lender may demand foreclosure on your home in order to recover his money.

Credit Card Balance Transfers

A credit card balance transfer involves transferring balances on multiple credit cards onto a single card.  The credit card to which the balances are transferred is typically low interest credit card with a lower rate of interest than the other credit cards combined.  This credit card should also have enough credit limit in order to support the additional balance.
There are two important thing is that you should be aware of when considering a credit card balance transfer as a way of consolidating credit card debt.  One, low interest rates on a credit card are often promotional offers.  Before transferring the balance on to the card you should be aware of how long the promotional offer is going to be in effect and when/if the interest rate is going to go back to its higher normal level.
Second, it is possible that your credit rating may be affected negatively by the credit card balance transfer.  Most of the credit scoring models consider something called the balance to credit ratio when calculating your credit score.  Putting too much balance on a single credit account that is very near to its credit limit will reduce the credit to balance ratio and may affect your credit score negatively.

Personal Loan

The advantage of taking a personal loan to consolidate your debt is that it is an unsecured loan.  You are not going to be putting your home, your automobile or any other asset on the line in case there are difficulties in the future in paying off this loan. Because of the same reason it may be difficult for you to get a personal loan if your credit rating has already suffered due to the presence of negative information on your credit report.  A poor credit score may prevent you from getting approved for a personal loan or getting one at a higher rate of interest.
One option is to have someone with reliable financial credentials to cosign with you as a guarantor on the loan.

Debt Consolidation Loans

Debt consolidation loans are provided by banks and credit unions for the exclusive purpose of consolidating your debts.  You will find that many financial institutions offer this service.  It is important to shop around and look closely at different offers in order to choose one that is right for you.  Since the market and specially the Internet is rife with exaggerated and false offers you should be careful as to who you deal with.  Anyone making unlikely claims of wiping out your debts without proving credentials that are  verifiable should be avoided.  Check the complaints in the records of the local business bureau and with the office of your states attorney general.  While you can expect to see some complaints, they should have been resolved by the company.
The best bet is to try and deal with your own bank or any other accredited bank that has a reliable debt consolidation program.  Apart from banks there are other accredited institutions and credit unions that give out debt consolidation loans as well.

You can use any of the above options to take out a debt consolidation loan.  You should however keep in mind that a debt consolidation only reduces the burden of your debt and does not make it go away.  What you are essentially doing is simply shifting the debt from one place to another.  Being charged a lower rate of interest and having to pay a lesser amount of money every month may tempt you to borrow more money on credit.  This will nullify any benefit that you are liable to get out of a debt consolidation loan.  You should practice discipline and responsible credit spending behavior until your debt consolidation loan has been completely paid off or you may find yourself in the same position a couple of years from now.
Taking out a debt consolidation loan should be given considerable thought since it involves taking out a new debt with the possibility of using some of your assets as a security.  Other options that you might consider before taking out a debt consolidation loan is credit counseling and a debt management programme.

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