Having several credit accounts with varying interest rates and due dates can complicate your finances. However, there is a way to simplify your financial situation. A loan consolidation involves applying for a new loan and using the funds from the new loan to pay off old loans. In the end, you'll have one loan and one monthly due date. And if you're able to obtain a lower, fixed rate, you'll save money on monthly payments.
Debt Consolidation Loan
Individuals with a good credit history and collateral may qualify for a debt consolidation loan from a bank or credit union. By means of a debt consolidation loan, you can combine all your outstanding loan balances into one new loan. There are two types of debt consolidation loans. An unsecured consolidation loan doesn't involve collateral. However, these loans are only available to people with an exceptional credit history--which is determined by individual lenders. Additionally, unsecured consolidation loans often feature higher interest rates. On the other hand, secured consolidation loans--which require collateral such as a vehicle title--feature reduced interest rates and are easier to obtain.
Home Equity Loan and Refinance
Homeowners can take advantage of multiple consolidation options. With a mortgage refinancing or a home equity loan, you can tap into your home's equity and borrow cash to pay off your debts. In the case of a mortgage refinance, lenders tack the borrowed money onto your new mortgage, which increases the balance and your payments. Home equity loans and home equity lines of credit do not involve a refinance. Instead, you'll apply for a consolidation loan and use your equity as collateral. Once you receive the funds, you'll use the cash to pay off your debts, then repay the home equity lender.
Consolidation Agency
If you don't qualify for a debt consolidation loan, refinance or home equity loan, consider using a debt consolidation agency to merge your outstanding balances and simplify your finances. Debt consolidation agencies manage debts and loans on your behalf. They don't lend money to pay off debts. Rather, they contact your creditors and negotiate better terms, such as a lower interest rate and monthly payment. Once a debt consolidation agency begins working with your creditors, you'll no longer send payments directly to your creditors. Instead, you'll send payments to the agency, and they'll distribute funds to your creditors.
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