While there are different ways to consolidate debt, a borrower must take caution to avoid complicating the situation. The question is, should you apply for a loan to get out of credit card debt? In this article, let’s take a look at the two loan options you can consider:
HELOC or Home Equity Loans
Any type of unsecured debt (credit card debt, medical bills, personal loans) can be consolidated using a Home Equity Loan. As the term implies, HELOC is secured by the borrower’s property. The loan amount is based upon the equity or the value of the house submitted as collateral.
Being a secured loan, the lending company can repossess the home should the borrower fail to continue with his/her payment obligations. In such case, the house will be placed on sale and the proceeds will be used to pay off the remaining debts and the borrower loses the property to his/her lender.
What makes a Home Equity Loan different from other kinds of secured loan is that it gives the borrower the option to take cash advance instalments at any time during the borrowing period. Thus, there will always be available funds should you need the cash to pay off your credit card bill for the month. As long you do not exceed your limit, which is determined by the equity of your home, you can borrow cash at any time without having to go through the process of application.
Debt Consolidation Personal Loan
Commercial lending companies offer secured personal loans which can also be used for debt consolidation. Again, you would need to submit collateral to be able to take a loan. If you are a homeowner, then this may be an option for you.
Once your application is approved, the money will be given in lump sum cash. The funds can immediately be used to pay off all your unpaid debts with your creditors. In turn, the borrower must pay back the loan in monthly instalments, according to the debt consolidation company’s terms and conditions.
Should I Use Loan to Pay My Credit Card Debt?
In extreme cases of credit card debt, the best solution may be to consolidate using either a Home Equity Loan or secured personal loan. Since both loans require collateral, there is always a risk involved and that is losing your home to your lender in the event that you default from your payment.
If you must use a loan to recover from credit card debt, see to it that you clearly understand your lender’s terms. Be realistic. Will you be able to keep up with the monthly costs? Have you set a doable budget to ensure that you will not miss or delay a single due date? Have you taken reasonable measures to cut back on your expenses and focus on your debt repayment?
If you are indeed ready to obtain a loan, spend time and effort to find a legitimate and trusted lending company. Keep in mind that although some loans are not scams, you can still be ripped-off if your chosen debt consolidation lender imposes unfair rates, hidden fees or unreasonable conditions. Thoroughly review your contract before signing up for debt consolidation.
