Getting a debt consolidation loan is a major financial decision and one that shouldn’t be taken lightly.
Before you apply for a debt consolidation loan, you should consider alternatives, figure out how you’ll make payments and make sure you’re finding the best rate available.
Unsecured loans are more common, but you can use a secured loan for unsecured debt, such as a home equity loan used for credit card debt consolidation. Secured debt consolidation loans are typically available at brick-and-mortar financial institutions, including banks and credit unions.
They use collateral, such as home equity used to secure a home equity loan, and generally have better interest rates than unsecured ones.
The formula for the cost of debt is the sum of the risk-free rate plus the credit spread times one minus the tax rate (Rf Credit Spread)*(1 - Tax Rate).
Debt consolidation loans are used to pay off and simplify existing debt by consolidating multiple payments and accounts into a single account with one lender and payment. Depending on your creditworthiness, you may be able to receive a lower interest rate on a debt consolidation loan than you are currently paying on your debt, saving you money on monthly payments and overall interest.
When you do a hard inquiry during the final approval process, it will be reflected on your credit report. Although debt consolidation loans are a legitimate solution for eliminating debt, some other debt consolidation options are scams.
However, if you have multiple hard inquiries within a 45-day period, it’s considered rate shopping and will only count as a single credit inquiry. It’s best to stick with trusted, well-established lenders such as the ones recommended on our list.
Because interest is deductible for income taxes, the cost of debt is usually expressed as an after-tax rate.If you have the collateral and can meet the requirements, a secured loan may save you money on interest as you pay down your debt.Home equity debt consolidation loans, a type of secured debt consolidation loan, offer a fixed interest rate.you don’t end up losing your home.” Repayment terms can be 10 years or longer, and if the value of your home drops during that period, you may owe more than your home is worth.If you’re facing bankruptcy, credit card debt is unsecured and typically discharged more easily than a home equity loan. Unsecured debt consolidation loans don’t require collateral, and they usually have easier approval requirements than secured debt consolidation loans.