Debts, debts, debts. It’s interesting to note that one type of debt can be utilized to pay off another debt. The process is called debt consolidation. And the usual candidates to totally wipe out loans or get rid of some are personal loans and cash-out refinances. These two debt consolidation loans can be effective depending on the circumstances involved.

Find out which is a better option for debt consolidation. Find lenders here, too.

A Tale of Two Debt Consolidation Loans

Weary and wary of credit cards whose annual percentage rates (APRs) can go higher for those with bad credit, you turn to either a personal loan or a cash-out refinance. But where do you draw the line and say that “I need this loan right now” or “This loan is better for this situation”?

Up Close With Personal Loans

To begin with, personal loans are made to cover an immediate or a future need for cash, consolidate credit card debt/other loans without dipping into one’s savings funds.

Personal loans are shorter-term loans. They can be repaid between a year and three years. Their rates are fixed and dependent on your credit. If your credit score is low, expect your APR to be in double digits. Of course, an excellent credit reputation leads to a better rate.

Because they are fixed-rate payments, it’s easy to calculate their monthly payments which remain the same throughout the loan term. If you are having trouble making your monthly loan payments, you could switch to a lower rate by refinancing.

Understanding Cash-out Refinance

Speaking of refinancing, we have the cash-out refinance. It’s replacing your old mortgage with a new one to get a better rate or adjust your term and that the same time, convert your equity into cash.

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Cash-out refinancing can be for homeowners running short of cash, looking to consolidate debts in the future, among a myriad of reasons. Being a mortgage, the repayment period can run between 15 and 30 years.

As to rates, cash-out refinance loans can take advantage of lower rates because they are first-lien mortgages. With mortgage rates hovering in the mid-three percent, you can save more on interest costs.

So Which Debt Consolidation Loan to Pick?

All that being said, each loan has its risks when you use to consolidate other loans.

With a personal loan, the evident risk is its rate is higher than a mortgage. While you can take some debts off your current load, you may have to make larger loan payments. You also need to have good credit to qualify for a personal loan per se.

The biggest risk of a cash-out refinance is your home. By taking cash out of its equity, you have to replenish it; this could be a problem when you need to refinance again.

More importantly, you are essentially adding debt into your existing mortgage thereby inflating it and its monthly payment. You are also stretching its repayment period, incurring more interest costs. When you mess up on your new mortgage, you could lose your home.

Using debt consolidation loans can lead to great results if utilized wisely. A personal loan has limited risk but its amount can be limited to cover your debts. Meanwhile, you have the cash-out refinance allows you to borrow more at a lower rate but you should never miss a monthly payment.

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