Debt consolidation can take many forms. One of these is a flexible type of loan called a line of credit debt consolidation loan. These types of loans can be either secured or unsecured. Basically a line of credit debt consolidation loan works like a cross between a credit card and a checking account. The bank approves your credit limit, interest rate and repayment terms. Then you are handed a pad of checks. You can use these checks to pay off your other debts and consolidate everything into one debt consolidation loan.
These debt consolidation loans can have some advantages. If you get a debt consolidation refinance on your home mortgage, then it is not a true debt consolidation. However, if this happens with a line of credit, you can keep re-consolidating until all your debts are together.
For example, if you have $15,000 in debt but you only qualify for $7,500 in a debt consolidation loan. By getting that debt consolidation loan as a line of credit, you can transfer $7,500 now and once you start to pay down the loan, ask for more money later. I recommend that you talk to a certified credit counselor for the best strategy. Also, a benefit of paying off your line of credit is that you have open credit available to you. Provided you don't max out what's available to you again, you should soon realize an improvement to your credit score.
Another benefit of the line of credit, is that it may also offer easy repayment terms. When you get this type of loan through your bank, ask if they can link it to your checking account. This way you won't be late on your payments. You just need to make sure that you keep enough money in your checking account to make the monthly payment. After a year, your good payment history will also help your credit score.
There are a few dangers and disadvantages to lines of credit.
First, if you do not pay them down, they can become as much of a burden as a credit card, which will make your debt situation worse. Second, if you don't stop using the other forms of credit that you have recently paid off with your debt consolidation loan, your overall debt just keeps growing. Which could eventually take you to bankruptcy. Third, if you have a lot of debt, a line of credit probably will not completely consolidate your consolidation. So you will still be left with many bills every month. Finally, and perhaps most important, lines of credit tend to have high interest rates. These interest rates can make it harder, not easier, to pay off your debt.
These disadvantages make it imperative that you have a plan for your debt consolidation. This is why it's important to work with an expert if you're considering debt consolidation. These advisors will tell you that working without a budget will likely lead you to bankruptcy.
A line of credit is perhaps the easiest form of debt consolidation to master, since it is most like what you already know, a credit card. You only pay back what you borrow and you don't have to borrow up to the limit that you're approved for. However, it is also can be one of the most difficult to use to get out of debt. I recommend that you only use a debt consolidation loan if you are very, very certain that you can withstand the temptation to use that extra credit. Otherwise, find another form of debt consolidation. Every person is different, so every budget and financial plan to get out of debt is different as well. You need to use caution and common sense when choosing your debt consolidation method. Because there are many options for you to choose, you can choose the loan or whatever method with which you feel most comfortable and safe.
Dan Lyne is a writer for lessen-your-debt.com. For additional articles and extensive resources for everything to consolidate debt and mortgage calculators just click the links.
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