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The Basics of Debt Consolidation Loans

Many people have the need for debt consolidation. But what are the choices when it comes to debt consolidation loans? You actually may have more options than you think. Take a look at a few of those before you jump into a plan that isn’t a good long-term solution.

Bankruptcy

Unfortunately, this is the first thing many people consider when they’re having trouble meeting monthly payments and dealing with a mountain of debt. While there are certainly times when bankruptcy is the correct solution, don’t jump immediately to this conclusion. Remember that your bankruptcy is going to be with you for many years. The bankruptcy notation will appear on your credit report and make it difficult to obtain any credit opportunities. Also, you’re likely going to be making payments on a bankruptcy settlement. It’s certainly better to make other arrangements if possible.

Home Equity Loans

The home equity loan is arguably one of the best and most available options for anyone seeking to consolidate debt. Home equity is the value of your home when weighed against what you owe against it. Simply take the market value of your home and subtract whatever you owe, usually your mortgage amount. Remember that some lenders won’t loan up to 100 percent of the value of your home. Lenders may limit the total amount owed on a piece of property to 80 or 90 percent of the value.

Home equity loans are typically easier to get because you’re putting something of value – your home – up as collateral. If you don’t make your loan payments, the lender has a way to recover at least some of the money you received as proceeds of the loan.

Secured Loans

If you apply for a secured loan, you’ll be putting something up as collateral. It could be a car, boat, stocks or some other item that has real market value. If you don’t repay the loan, the lender can take the items used to secure the loan and sell them to recover the amount of the loan.

Personal Loans

This is sometimes more difficult to secure because it’s simply your word against the amount of the loan. In this case, you’re not putting anything up for collateral. You’re asking the lender to trust that you’ll meet the terms of the loan. A credit card is an example of a personal or unsecured loan.

Using Credit

This isn’t usually a long-term solution, but can buy you some time. You can use one credit source to pay off another. The advantage is that you’ll be making only one payment instead of multiples. The downside is this can become a habit that does nothing for your long-term debt.

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