Posted: 1 Oct '22

How Can a Debt Consolidation Loan Help You Regain Control of Your Finances?

How Can a Debt Consolidation Loan Help You Regain Control of Your Finances?

Managing your finances can be a tall order if you have several active loans from different lenders. Not only will you be paying more in interest rates, but you also run the risk of skipping some payments and hurting your credit score. With debt consolidation, you take one low-interest loan and use it to repay all the other (high-interest) loans. In other words, you are combining multiple debts with varying interest rates into one huge loan with lower rates and a longer repayment period. By consolidating your debts, you can better keep track of all your finances. Similarly, if you manage to secure a low-interest debt consolidation loan and still maintain your monthly debt payment rate, you can pay off your debt faster. To learn more, call us today.

How Debt Consolidation Loans Work 

Before we look at the many ways you can secure a low-interest debt consolidation loan, it’s essential first to understand how these loans work. Once your lender has approved your debt consolidation loan, you will have two options to choose from. One is to have the money deposited directly into your account so you can pay off the loans, and two, for the lender to pay off the other debts on your behalf. 

The loan amount and the interest rates are largely determined by your credit score, collateral, and income requirements. Most banks and credit unions will only focus on two: credit score and income or credit score and collateral. However, some will require all three depending on the perceived risk.

Debt Consolidation Loan Options

Before consolidating your debts, you always want to compare all the available options and choose one with the best rates. Here are some options you can explore:

  • Home Equity Loans. This is a second mortgage loan taken against the equity you’ve built on your home. It’s given as a lump sum, and you can use the money to pay off your other debts. To qualify for this loan, you should have a good credit score and at least 20% equity in the property.
  • Line of Credit. You can secure a line of credit using your home as collateral or through your bank, provided you have a good income and a good credit score. This option may not work well if you need a lot of money to pay off the debts at once. You also need a solid repayment strategy, lest it will take decades to pay off.
  • Credit Union/Finance Company Loans. This is the other option you may consider if you have a good credit score and good collateral.
  • Credit Card Balance Transfers. If the above three options don’t work for you, you may want to check out the credit card balance transfer. With this option, however, you should pay off the balance by the end of the low-interest period, lest it becomes a trap.    

Get Help Where Necessary

A debt consolidation loan can be a great tool to minimize your debt, plan your finances and improve your credit score. However, you always want to evaluate all the options and understand the risks before going all-in. If you think this is something worth considering, get in touch with BMC Mortgage and Investments for debt consolidation advice.