Debt Consolidation Loans: How Banks Profit & Options for Good Credit

Because of the cost of credit debt consolidation services, many people with good credit are looking for low interest loans to pay off their debts. Many banks welcome these types of loans the make money in two ways: the banks charge a fee for the loan and then make money from the monthly interest payments.

How to Use a Bank for Debt Consolidation

If you own a home with a substantial equity a second mortgage or home equity loan might be the best deal. Since this loan uses your home as collateral, the banks are more willing to lend. With this type of loan, you have to go through the same type of approval process as you did with your original mortgage.  This type of loan puts a lien on your house, so you cannot sell the home without paying off this loan as well as the first mortgage.

Some banks will also offer debt consolidation loans for customers that do not qualify for a Home Equity loan. To qualify you usually need a high credit rating, a job with a strong employment history and a stable occupation. These loans are difficult to obtain, but not impossible.

Fees for a Bank Mortgage Loan

Besides processing fees another common type of fee is ‘points’. Points refer to the finance charges paid by the borrower at the beginning of a loan in addition to monthly interest. Each point equals one percent of the loan amount. If you plan on taking out a loan for $100,000 and they are charging three points, you will have to pay $3,000 to obtain the loan. Paying more points you may help to lower the interest rate. Usually instead of paying the points up front, they will usually add the amount into the loan. If you have excellent credit you might be offered a loan with no points.

If you plan to stay in your home for less than five years, it is not advisable to pay for points. You will not be there long enough to cover the additional payment since in the first five yours you are practically paying nothing but interest. If you’re planning to stay in your home more than seven years, paying points and getting a lower interest rate will save in your overall payments. You need to figure out how long you plan to stay in your home and calculate where you have the best advantage, with points or not.

Conditions Attached to Debt Consolidation Loans

Since you are planning to use this loan to reduce credit card debt, the bank will probably add conditions to the loan. Some of these can be canceling your credit cards once they are paid off. Sometimes, you will need to submit your current credit card bills and the bank will issue the checks to the company with a notice to close the account.

Another condition might be using a financial counseling service to review your financial situation to help with a budget for you to reorganize your spending. There are some services that will receive your income and give you an allowance. They make your payments while they keep you on a tight budget until your situation improves.