Understanding the Different Types of Debt Consolidation Loans Available

Consolidating debt involves combining multiple liabilities into one payment, which can help pay off debt more quickly. But not all loan products are created equal, so be sure to shop around and compare terms when selecting a lender.

Remember that a debt consolidation loan may lengthen your repayment term, meaning you'll pay more interest over the life of the loan. That could offset any potential savings.

Unsecured Personal Loan

An unsecured personal loan is a loan that does not require collateral such as a car or home. Instead, lenders evaluate borrowers based on their financial profile, including credit history and income. Loan amounts, rates, terms, and permitted uses vary by lenders like Symple Lending. Borrowers should compare rates, terms, and fees to find the best options. Personal loans are usually paid back monthly and can help borrowers improve their credit scores when used wisely. Credit unions and banks offer unsecured personal loans that help members boost their credit scores while lowering their debt burden.

A personal loan can be used to pay for various expenses, including home improvement projects and existing debt. 

Line of Credit

A line of credit is a pre-approved loan amount you can access as required. You pay interest only on what you use, and as soon as you repay the amount borrowed, it becomes available for you to borrow again.

Like other debt consolidation loan options, a line of credit can reduce your monthly payments and simplify the payment process by combining multiple debts into one monthly payment. However, a line of credit has several differences from other debt consolidation loan methods that make it unique. You can talk to experts at Symple Lending to learn more. 

While a line of credit offers flexibility and convenience, it can also be expensive if you carry a high debt-to-income ratio. To help mitigate this risk, lenders typically evaluate your debt-to-income ratio and credit score when assessing whether or not to offer you a line of credit. They also verify your income to ensure you earn enough to cover debt repayment expenses comfortably.

Home Equity Loan

A home equity loan (or second mortgage) allows homeowners to borrow against the equity they've built in their homes. It can be used for various purposes, including paying off high-interest credit card debt. Homeowners can typically qualify for a home equity loan based on the combined debt-to-value (CLTV) ratio, credit score, and payment history. Home equity loans typically offer a fixed interest rate, which may benefit some people who want predictable monthly payments.

Unlike other types of debt, home equity loans are secured by your property, meaning the lender can foreclose on your house if you fail to repay the loan. This is a significant risk, so many people only use home equity loans for significant expenses they can afford to repay. Home renovations and remodeling are also popular uses for this type of debt, which can increase your home's value while potentially making it more energy-efficient.

Secured Personal Loan

Unlike an unsecured loan, a secured personal loan is backed by something you own -- such as money in your savings account, a certificate of deposit, or the title to your car. Banks and credit unions typically offer these types of loans. Many lenders offer perks for existing customers, such as waived origination fees or interest rate discounts on secured loans.

Like unsecured loans, secured loans require financial statements and credit checks to qualify, but they are often easier to get if you have assets to offer up as collateral. Because of this, secured loans have lower rates and more flexible terms.

Remember that if you miss payments on a secured loan, your lender might repossess the asset you used to secure it. This negative mark can appear on your credit report for seven years and damage your credit score. For this reason, it's essential to assess whether a secured loan makes sense for your circumstances before applying.