Hi TheRealTO,
Thank you for your question. The subject of consolidating debt is always a popular topic. In order to address what type of loan to consider for consolidating debt, you first need to determine if consolidating is really in your best interest. Below are a few things to consider before consolidating:
Ask yourself why you are considering consolidating your debts
- Do you need to lower your monthly payment amount?
- If so, have you first reviewed your budget to find ways to cut back on unnecessary expenses?
- Do you only need short-term relief on your payments?
- If so, have you considered contacting your creditors directly to discuss payment options?
- Will it help you pay off the debt faster?
- Is your desire to consolidate your payments for ease of management?
Compare the terms, fees, and annual percentage rate (APR) of the new consolidation loan to your existing debts
- Are your credit scores and debt-to-income ratio good enough for you to qualify for a loan, and at a favorable rate?
- Is the APR higher or lower? It's possible you could lower your monthly payment with an extended repayment term, but have a higher APR, and ultimately pay more.
- Are there any fees associated with the loan?
- Are you paying more or less over the life of the loan?
Consolidation loan versus a balance transfer
- Is some of your debt credit card debt?
- If so, are the terms more favorable transferring the balances to another credit card versus a consolidation loan?
- Do you qualify for any special balance transfer offers?
- If so, can you pay off the balance you transfer during the promotional APR period?
If you still feel a consolidation loan is in your best interest, you can consider a couple of different routes. Some financial institutions offer loans specifically for debt consolidation, where the lender pays off your debts directly. You could also consider an unsecured personal loan, and use the proceeds to pay off the debts. A third option might include a secured loan that is backed by the equity from an asset such as your home or vehicle. These loans enable you to borrow from your equity and tend to have more favorable rates as a result; however, failure to pay on a secured loan could mean losing the asset backing the loan.
In some cases, simply reviewing your spending, developing a debt repayment strategy, automating payments, and changing a few behaviors can save you the most time and money.
Thank you for your membership and please let us know if you have any additional questions.
Mikel
