Debt Consolidation Loan Options

So you’ve painted yourself into a corner and you’re looking at various avenues, but you’re not ready for bankruptcy court or debt settlement/arbitration. It might be a good time to consider a credit card debt consolidation loan.

In this section we’ll explore:

• What a debt consolidation loan is and how it works
• Pros and cons of debt consolidation loans
• Timeframes and processes involved

What It Is…How It Works

Credit card debt consolidation loans, simply put, pay off all your creditors in full. You, in turn, have one payment monthly to pay off the loan. You then head off collection efforts and fees, and have a loan with a much lower interest rate than the credit cards all carried. The lender will usually lower their risk by securing the loan against the equity in your house. Sounds a lot like a home equity loan or second mortgage, doesn’t it?

Debt Consolidation Pros and Cons

If your credit scores are good, you might be able to get an unsecured loan from the lender. Obviously, that’s a Catch-22 double bind, though…if you’re in this situation to start with, your credit scores are probably in the tank already. That will mean borrowing against one of your only sources of security, your home. And if you fall behind on payments or default on the loan, the lender could very well foreclose on your property.

Of course, if you’re in one of the many parts of the country where home prices have plummeted, you may not have enough equity (positive difference between what you owe and your home’s current market value) for this to even be an option. If you don’t own a home…well, the chances of an unsecured loan for credit card debt consolidation are pretty slim.

The upside is that by paying off all your credit cards down to zero balances, you should be able to keep your credit scores from taking any worse of a beating than they already have. Also, obviously, it’s a lot easier to keep track of one payment per month than a whole mailbox full of them, all with different due dates! That, in turn, will make it a lot easier to lay out and stick to a monthly budget. Plus, considering the snowball effect of interest and fees on credit cards, your single payment is likely to save you a few hundred dollars a month.

Timeframes and Processes

As far as the process for getting a loan of this type, your first step should be to talk to a nonprofit, above-board consumer credit counseling service to find out what is going to work best for you and to see if you’re going to be a good candidate in the first place. Next, talk to your bank or credit union to see what your prospects are; they may suggest that you see a mortgage broker as well. But tread carefully here; it’s your home that’s on the line.

The timeframe to discharge a loan like this will vary according to your ability to pay and the terms you can reach on it. Bear in mind that with lower payments, this could be one of the most drawn-out ways to pay down your credit card debt…possibly stretching over five to twelve years.