Two powerful incentives for credit card debtors to choose loan consolidation are 1) the high interest rate associated with plastic money and 2) Congress’ authorization of a hike in the minimum monthly payment that borrowers must pay. First, depending on consumers’ credit rating and history, interest on many credit cards can range from 20 to 27%. Such high fees apply, for instance, to consumers who have been delinquent in or skipped payments. Secondly, Congress’ recent law bumped the minimum monthly payment that credit card borrowers are required to make from 2% to 4%. This translates into a noticeable increase in card holders’ minimum monthly amount due.

A debt consolidation loan is ideal for credit card debtors with a bad credit history and a significant debt, as it helps them manage and reduce their balance. Debt consolidation loans are, in essence, personal loans that are intended for repayment of a borrower’s other loans and rehabilitation of the latter’s credit score. Consumers may avail themselves of various credit consolidation options. The most popular types of credit card consolidation loan programs can be divided into secured and unsecured loans:

1. Unsecured debt consolidation loans

Collateral, such as real property, is not required to obtain an unsecured debt consolidation loan, which combines credit card balances into one low monthly payment. Unsecured debt consolidation loans typically charge higher interest than their secured counterparts. However, they usually boast lower interest rates than other personal loans, such as credit cards.

One category of unsecured debt consolidation loans and the most common method for consolidating credit card debt is the credit card balance transfer. This loan is optimal for consumers who are not homeowners. A credit card balance transfer enables borrowers to transfer all their credit card balances to one credit card with the lowest rate of interest and a more favorable payment option. Annual percentage rates (APRs) that were previously running from 12 to 24% are lowered to 10, 6 or 0%, thus generating substantial savings for borrowers. Interest rates in the range of two, one and zero percent are readily available in the marketplace, and educated borrowers will find this credit card debt reduction strategy to be extremely appealing. This is because customers will have the opportunity to pay off their credit debt without being subjected to interest fees. Such a consolidation loan allows card holders to combine their bills into a single easy-to-manage, fixed monthly amount.

Numerous credit card companies extend to consumers free balance transfers from their previous credit card. Once borrowers transfer the balance to the new company, they can benefit from a grace period in which they are charged significantly less on the credit card debt. Pursuant to this strategy, individuals must first wait for their old account to expire before opening a new account that provides for a balance transfer. Upon transferring the amount due to the new card, they will be granted a grace period of low or nonexistent finance fees. Borrowers seeking to carry out a balance transfer should first close their old account, since having more than two active credit cards may negatively impact their credit card rating.

2. Secured debt consolidation loans

To qualify and be approved for these credit consolidation loans, consumers must pledge collateral (i.e. car, home). Homeowners may be eligible by utilizing the equity they have accumulated in their home. Secured debt consolidation loans feature low interest rates and flexible terms. Putting up the house as collateral is a worthwhile investment, as long as borrowers avoid using the loans for a purpose other than repayment of their personal debt.

There are several types of secured debt consolidation loans:

Cash-out refinancing is one of the most efficacious and commonly-employed methods for tackling high debt and wiping the slate clean. Individuals with equity in their homes can access those funds and put them to use where needed, instead of continuing to make payments on high interest credit cards. A cash-out refinance debt consolidation loan, which substitutes mortgage debt for revolving and credit card debt offers consumers numerous benefits including the following:

One lump sum of cash A single payment to make at bill time One lower interest loan to repay high-interest credit card debt Less outstanding loans reflected in the credit report The opportunity of financing up to 100% of their home’s value A reduced monthly payment, which frees up funds for daily expenditures A shorter term with a brand new loan A higher credit score A tax deduction for interest paid on the consolidation loan

Credit cards are viewed less favorably than a cash-out refinancing loan for debt consolidation, particularly when balances on the former are 35-50% higher than the maximum balance permitted. Consumers’ credit rating increases when they repay a debt consolidation loan.

The second mortgage debt consolidation loan is another option available to individuals overwhelmed by credit card balances. Second mortgages take the form of either home equity loans or home equity lines of credit (HELOC). A home equity loan enables borrowers to acquire a lump sum, which they repay in accordance with a fixed schedule extending over a set of number of years. To acquire the needed financing, homeowners have the choice of obtaining an equity loan utilizing their equity or even surpassing their home’s appraised value. They may sometimes be allowed to borrow an amount up to 125% of their home equity. A home equity debt consolidation loan is a boon for borrowers with a poor credit history, for it is hassle-free and helps to liberate them from debt. It offers countless advantages for debt consolidation purposes, which include:

Transfer of debt from many credit card companies to a single lender granting a lower interest rate

Flexible repayment terms A lengthy repayment period Repayment of credit balances with one lump sum, as opposed to numerous payments due on different dates Deduction of the home equity loan interest Reduced monthly payment to pay off the debt

Since credit card holders need only make one payment, it is easier for them to keep track of their monthly financial obligations. The only caveat with second mortgage debt consolidation loans is that borrowers run the risk of losing their home in the event that they default on their bills. The other second mortgage debt consolidation loan is the home equity line of credit (HELOC), which functions very much like a credit card. Consumers are granted a line of credit, and they can tap into its funds on the condition that they do not exceed the maximum authorized sum. HELOC interest is also tax-deductible.

To determine whether debt consolidation is more financially-advantageous through a cash-out refinance loan or a second mortgage, credit card holders should compare the current interest rates to those in effect when they took out the first mortgage. If the existing rates of interest are lower, a cash-out refinance is preferable since the rate charged by the new first mortgage can be lower than the current one.