What Is Reloading?
Reloading is one of the most popular debt management strategies around and involves taking out a new loan to pay off existing debt. The purpose behind reloading is to secure a lower interest rate than an individual's outstanding debt currently carries.
Debt consolidation loans are the most common loan vehicle people use to consolidate their debt, but personal loans, lines of credit, and HELOCs can also be used for this strategy.
Understand The Basics Of Reloading
Imagine an individual with 3 high-interest credit cards that are nearly maxed out. The high interest rate, usually between 19% and 21%, makes it difficult to regain control over the debt, especially if they are making only the minimum payment each month.
For those in this situation, reloading is a common and effective strategy. Essentially, these borrowers will take out a consolidation loan large enough to pay off all outstanding credit card balances, leaving them with a single monthly payment to deal with.
This consolidation loan will ideally come with a drastically lower interest rate, usually between 8% and 12%, which will make it much easier for the borrower to pay down the balance. It will also cost them significantly less in interest charges over the life of the loan.
Debt Consolidation Explained
Debt consolidation loans can be broadly separated into two categories - secured and unsecured debt. Both offer their advantages and disadvantages.
Secured debt involves any debt that has been guaranteed by pledging an asset. Should the borrower default on their loan, the lender is legally entitled to take possession of the pledged asset and sell it to recuperate any financial losses they may have incurred.
Below is a list of secured loan vehicles commonly used for debt consolidation. Secured debts come with lower interest rates than unsecured debts because they pose less risk to the lender.
- Home Equity Line Of Credit: A revolving line of credit that allows homeowners to borrow against the equity in their homes
- Secured Personal Loans or Lines Of Credit: Personal loans or lines of credit may be secured by a vehicle, home or property, investments, or anything else of value the borrower may possess
Unsecured debt involves loans or other financing forms that have not been guaranteed with some form of collateral. Unsecured debts are more common and generally accompanied by a higher interest rate than secured debt. The main benefit of unsecured debt is that in the event of default, the borrower does not stand to lose any property like they would with secured loans.
- Consolidation Loans: The most common type of loan used for reloading
- Credit Card Balance Transfer: Most credit card issuers offer a balance transfer promotion in which any balance transferred from another card to the freshly issued card will be subject to 0% interest during a six to twelve month promotional period
- Line Of Credit: Unsecured revolving lines of credit are also commonly used vehicles for debt reloading
Example Of Reloading To Consolidate Debt
Consider an individual with $20,000 of credit card debt spread out evenly over three cards. Each card carries a 21.99% interest rate. By paying just the minimum payment, it can take nearly 30 years to pay off the debt.
A much better solution would be a consolidation loan. In this scenario, the individual would take out a consolidation loan for $20,000, using it to pay off all outstanding credit card balances. Because the consolidation loan will likely carry somewhere around 12% interest, they will save thousands of dollars over the long term.
Debt Consolidation Loan Companies
- Discover: The best choice for those with a strong credit score. APR can be as low as 6.99% and max loan amounts are up to $35,000
- Avant: A good option for those with a less than stellar credit score. Interest rates are higher than those offered by Discover, but Avant is willing to work with lower-income earners with weaker credit scores
- SoFi: With up top $40,000 available, SoFi is a good option for those needing to consolidate more than what Avant or Discover may offer. SoFi also offers competitive interest rates and low origination fees