Reloading

Reloading is the practice of taking out a new loan to pay off an existing loan to obtain a lower interest rate or to consolidate debt. 

Reloading could be employed by a cardholder with a large outstanding credit card balance that is accruing interest at a high rate. Because of financial constraints, the cardholder makes only interest payments while the principal increases with continued card use. If the cardholder is a homeowner, they could take out a tax-deductible, lower rate home equity loan to pay off the credit card debt. This would solve credit card problem in the short term, but there is risk of beginning a spending and borrowing cycle that deepens overall indebtedness.

Consolidation loans can aid consumers with heavy debt on more than one credit card. A debt consolidation loan allows them to pay credit card off in full using the new loan. This reduces collection calls received and simplifies monthly payments from several to a single payment to a single payee. And, it can enable the borrower to improve their credit score by making on-time payments.

Consolidation loans may be secured or unsecured. Secured loans are tied to an asset such as a house, car or other property that is used as collateral in the event that the borrower defaults on the loan. Unsecured loans are not tied to an asset and are based on credit history and are considered high risk for a lender. Secured loans are easier to obtain, available in larger amounts at lower interest rates and may be tax deductible. But they have longer repayment schedules so may cost more and they place the asset used as collateral at risk in the event of default. Unsecured loans carry no asset risk but are more difficult to obtain because the borrower is perceived by the lender as high risk. Loan amounts generally are smaller with higher interest rates and no tax benefit.

A simple consolidation loan example is a zero percent interest credit card balance transfer. A card company could allow the borrower to combine debt from several cards on one card with no transfer fee and no interest payment for a specified time, usually 12-18 months. Another option is a consolidation loan from a credit union or peer-to-peer online lender. Qualifying requirements usually are less stringent than for banks and the terms more favorable to the borrower. However, not every financial problem can be solved by debt consolidation. In some cases, debt settlement or bankruptcy may be better solutions.