How Does Debt Consolidation Work?
As Investopedia explains, debt consolidation involves taking out one new loan to pay off multiple debts. Ideally, the new loan will have more favorable payoff terms. How does debt consolidation work? Is debt consolidation right for you?
Exploring How Debt Consolidation Works
If you opt to consolidate your debts, you’ll apply to a bank or lender for the consolidation tool that you want to use. If you’re approved, the lender may pay off your existing debts directly. Or, they may send you the funds and make paying off the debts your responsibility. Then, you’ll begin paying down the new debt with a single monthly payment. As Forbes points out, debt consolidation streamlines the payment process, but the terms vary depending on the type of debt consolidation that you choose. There are several options:
- Debt Consolidation Loan: A type of personal loan, debt consolidation loans simplify budgeting and payments, lower interest rates, and give you a chance to secure better loan terms. Shop around to find the best loan for your needs.
- Cash-Out Mortgage Refinance: With this type of home loan, you take out a new mortgage for more than the outstanding balance of the loan. The difference provides cash that can be used to pay off debts. This allows you to finance a payoff of outstanding debts at an interest that is far lower than you’d find with other forms of financing. However, it is tied to your home.
- Home Equity Loan: Your home serves as collateral for this type of loan, so you’ll want to proceed with caution. The money is issued in a lump sum and can be used to pay off debts. Once it’s dispersed, you’ll need to begin repaying it with interest, but the rate tends to be lower than you’ll find with many other types of financing.
- Student Loan Consolidation: If you have multiple federal student loans, combining them into one government-backed loan may make life easier. Be sure to check the fine print carefully.
- Credit Card Balance Transfer: When opening a new card or receiving a special offer, you may be able to transfer existing balances to a credit card with a special low rate. This can provide an opportunity to pay down debts, but remember to check for transfer fees, watch for deadlines, and make sure to make all payments on time.
Deciding If Debt Consolidation Is Right for You
Is debt consolidation right for you? According to Credit Karma, debt consolidation is a good idea if you’re in debt, understand why, and are focused on taking control of your finances. It’s also helpful if you have the credit history to qualify for the debt consolidation tool that you’re interested in. In addition, you’ll need enough income to make your debt payments.
Are there times when debt consolidation isn’t worth it? Credit Karma explains that if you only have a little debt or can’t qualify for a desirable debt consolidation tool, then it might not be a good strategy. In addition, if you aren’t in a position to change your spending habits, debt consolidation might not be the right choice.
Are you interested in a cash-out refinance mortgage? Whether you want to tap into your home equity to consolidate debts, fund home renovations, pay for education, start a business, or invest in a different dream, the loan experts at PrimeLending West Texas can help you explore the pros and cons of a cash-out refinance. We’ll listen carefully to what you hope to achieve so that we can assist you in finding the best path forward. With a wide range of loan products to offer, we’re happy to help you sort through your options. We’ll serve as your guide throughout the entire refinancing process. Contact us today to discuss the possibilities.