About Loans for Personal Debt

Taking loans for personal debt can be a clever way to reduce monthly interest payments, improve quality of life and get out of debt that much faster. It's also a significant risk, as paying off revolving credit lines makes them available to abuse once again--which could end up putting a borrower even further into debt.

Significance

Before borrowing money to consolidate personal debt, construct a clear plan for paying it back. Determine how long it will take and allow for the unpredictable to happen. Job loss, injury, illness accident or any number of unpredictable events can cause even the best laid plans to go off the rails. Weigh the risks and exercise strong financial discipline in order to ensure that a debt consolidation loan is a rescue line rather than a noose.

Function

There are two main ways to take out loans to finance personal debt - personal loans and home equity loans. The former requires sufficiently good credit to qualify for a loan, while the latter only functions when the borrower has sufficient home equity to provide as security for the loan. A personal loan is less risky, but often involves higher fees and interest rates. Home equity loans cost less and are easier to be approved for, but if the loan goes delinquent, the lending institution has the right to either seize more home equity or can take possession of the house itself.

Features

Any plan to use borrowed money to finance debt should coincide with another one to reduce household expenses. Try to cut all non-essential expenditures so that the debt can be paid off as soon as possible. Any significant debt that you hold compounds your financial risk should you find your income stream interrupted for whatever reason. Reducing your expenditures may reduce your quality of life temporarily, but it's something that any household can adjust to with time, effort and discipline.

Considerations

Outline your budget and repayment plan when discussing debt financing with a bank. There's no real reason to go to a debt consolidation service--they will only charge you a fee for negotiating with lenders for you, which is something that you can do yourself without much difficulty. Document your income and expenditures. Bring a folder to your bank demonstrating a time-line for paying back a loan. If you have insurance, be sure to document that as well, so the lender knows that you will be protected in case something unpredictable happens. Bringing proof of employment will also help you to successfully negotiate a debt financing loan.

Potential

If your debts are very substantial, you may benefit more from negotiating directly with your creditors rather than using a loan to pay back the debt temporarily. Settling a debt rather than paying it in full does temporarily impact your credit rating, but it can save you, in many cases, more than half of the total money that you owe on the debt. Negotiate with your creditors directly. Use key phrases such as "financial distress" in your conversations to help speed your way to settlement.

Resources

• American Education Services: Dealing With Debt
• Wells Fargo: Debt Consolidation Services
• Bankrate: Debt Consolidation Considerations