Taking a consolidation loan for credit card debt seems like the most viable choice, especially if you are in pinch. You can choose between taking secured loan, which demands collateral in the form of asset, or unsecured personal loan. Personal loan is usually the preferred method. Its interest rates are higher than secured loan. But compared to credit card interest rates, it is still lower. Before making your move, you need to understand better about this type of loan.
Getting Loan for Credit Card Debt
Secured loan for credit card debt is perfect for card holders who have low credit ratings. It has low interest rates compared to unsecured loan. Borrower is asked to provide collateral for their loan. House is the most common collateral used for this type of loan. It is called mortgage loan. However, repayment program can extend up to ten years or even longer. Borrower can lose their house too when defaulting from the loan.
Another secured loan for credit card debt option is 401(k) loan. It is possible for worker that has retirement account insured by their employer. It is borrower’s own money but still needed to be paid back. Interest rates are low and the loan will not appear on credit report. However, failure to make payment can result in severe penalty. In the case where worker leaves or loses their job, they are expected to pay off the loan in 60 days.
Taking personal loan for credit card debt is the most interesting choice for some people. They can combine their debts into one and pay it at lower interest rates. The fixed interest rates can go lower if borrower has stellar credit score. With great planning, there is a possibility to shorten repayment plan for this personal loan. It is done by adding additional payment to your monthly minimum payment.
But this type of loan for credit card debt also has its catches. Lending company usually requires loan origination fee to be paid upfront before obtaining personal loan. The fee ranges from 1% to 6%. There is a chance that it can harm you in the future too. Personal loan has its own time limit which is only for few years. It means that monthly payment can be very high.
Consolidation loan for credit card debt can also be done by transferring all existing balances to balance transfer card with 0% introductory interest rate. The period of 0% rate lasts for months, usually from 12 to 18 months, depending on credit rating. If you can repay the loan during this period, it is a very beneficial to you. However, when standard rates have been applied, it will result in another problem.
It is important to understand the stem of your debt before taking loan for credit card debt. The main reason for having debt on credit card is high debt-to-income ratio. That can happen because borrower has excessive spending habit. Another possible reason is too small income. Prior to obtaining another loan to solve your debt problem, it is best to address this issue first. Perhaps there is a much needed modification to your financial life.