Types of Debt Relief There are generally four different types of debt consolidation an individual could choose from:
A credit card balance transfer
A debt consolidation loan
A home equity loan
A personal loan A credit card balance transfer allows a debtor to take the balance from various credit cards and transfer it to a single credit card. This would allow a debtor to make a single monthly payment on all of their credit card bills with, hopefully, a lower interest rate. However, consolidation of credit card debt is not without its pitfalls as well. For instance, some debt consolidation companies may offer lower interest rates for a limited time, but after that time is up, a debtor may end up paying off their debt at a higher interest rate than they originally expected. Another issue to think about is that consolidating your credit card debt could lower your credit score until you have made good progress with your payments. A debt consolidation loan differs from a personal loan, which is described below, because a debt consolidation loan is borrowed for the specific purpose of paying consolidated debt. A personal loan could theoretically be used for anything, but a debt consolidation loan is controlled by the lender who pays off the borrower’s debt. The borrower will not even touch the money from a debt consolidation loan. A debt consolidation loan is not always beneficial for a debtor. First, a debtor generally needs a good credit score to obtain the loan in the first place – and moreover, if a debtor wants a lower monthly payment, they must typically extend their repayment period. A longer repayment period may mean a debtor would once again pay more than their original debt. A home equity loan is a loan that is secured by using the equity in your home as collateral. The amount of money you can borrow is tied to your income, credit history, and the equity or fair market value of your home. The downside is that your home can be foreclosed upon if the payments become unbearable. By comparison, Chapter 13 bankruptcy can help you avoid foreclosure. The final method, a personal loan, may also be used as a debt consolidation loan. Whether the debtor can receive a personal loan large enough to cover all their consolidated debt would depend upon the state of their credit score. Personal loans are usually unsecured, meaning the debtor does not need to put up property as collateral. If the debtor can obtain the loan, the idea is to use it wipe out their consolidated debt and make fixed payments to the creditor over a certain period until the loan is paid. However, debtors should be aware that having a high interest personal loan could cost them more money than their original debt.