Credit card debt loans, also called debt consolidation loans, are useful tools that allow consumers who are strapped by escalating monthly credit card payments and other debt, to consolidate credit card debt into one loan, with a single manageable monthly payment. A consolidation loan takes several smaller consumer debts, two or three credit cards, and the balance of an auto loan, a student loan, or other personal loan and combines them into one large debt obligation.
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Usually, these loans feature a fixed rate and term of anywhere from 5 to 15 years. They effectively spread a consumer’s debt over a longer period, with a lower interest rate, which often results in dramatically lower monthly payments.
Can’t I just make minimum payments instead of taking out a debt loan?
If you only make, or are able to make minimum payments on a revolving credit card account, it will take many years to pay off a significant balance, and that’s if you no longer use the card to charge additional purchases during this time.
As an example let’s say you have a credit card, and you’ve reached the limit of $5,000 minimum required payment each month, about $100, and not use the card further, it would take you about 24 years to pay off the debt!
When you charge that lovely scarf for your wife’s birthday, put lunch with your boss on your card, or take your kids on a weekend trip to the amusement park to build your credit card bonus points, your intention is certainly not to pay for these items for the next quarter of a century!
A handy credit card calculator is featured on the U.S. Federal Reserve website. This easy to use web tool will compute the amount of time necessary to pay off a given balance at current interest rates.
Why have consolidation loans become so popular in the last few years?
The best way for a consumer to avoid default and the resulting long-term damage to their credit rating is to get off the revolving credit card platform and pay off their cards. Without using savings, retirement funds, or other reserves, this usually means taking out a consolidation loan.
Credit cards are very profitable vehicles for banking concerns that is, until cardholders stop making their payments and default in large numbers, as happened in 2008 and 2009. This period followed the global banking crisis, and marked the beginning of the current economic recession.
Banks earn their highest profits when consumers maintain constant balances on their credit cards. Congress enacted the Credit CARD Act of 2009 to help consumers better understand how revolving credit card accounts work and to stop a number of unfair and costly practices by credit card issuers.
When should I apply for a consolidation loan?
Consumers should apply for a consolidation loan while their accounts are current and their credit score is high enough to qualify for a reasonable program. By consolidating debt, most consumers will have extra money each month to use for necessities, or funds to save for future needs, or retirement.
What are the best ways to consolidate or eliminate my credit card debt?
Secured loans such as home equity loans are generally the least expensive alternatives when considering consolidating credit card debt. Home equity loans, traditional second mortgages offer reasonable fixed rates for a 10 or 15-year term.
Home equity lines of credit, HELOCS, are also available for terms of 10 to 15 years at currently record low variable rates. For instance, payments on a 15-year home equity loan of $20,000 at 4% interest, is around $200 per month. A similar credit card balance would require a monthly minimum payment of $500 to $600 per month.
Since mortgage rates continue at historic lows, many homeowners choose to refinance their first mortgage, using equity they’ve built up during the years to pay off and manage their credit card debt. For instance, at a rate of 4%, homeowners pay $4.77 for each $1,000 borrowed. Using the previous example, $20,000 would cost only $95 per month on a typical 30-year mortgage.
For non-homeowners, unsecured loans are an option but generally more expensive. Since the bank has no collateral in the event of a borrower default, they make up for it with higher interest rates and shorter terms, 5 to 10 years. They’re also tougher to qualify for, but well worth it to avoid potential financial ruin and/or bankruptcy.
Many websites offer assistance in sorting out credit issues and looking for consolidation loans. One such site is sponsored by the Federal Trade Commission.
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