What Is Reloading?
- Reloading involves taking out new loans to pay off old debt or to consolidate multiple loans into a single loan.
- Reloading is generally used by credit cardholders to slash interest rates in case of high debt.
- Consolidation loans that combine multiple card balances into a single loan are generally used in reloading.
- Consolidation loans may be classified as secured or unsecured, depending on if they're tied to an asset such as a house or car.
- Secured loans are easier to obtain, available in larger amounts at lower interest rates, and may be tax-deductible. Unsecured loans carry no asset risk but are more difficult to obtain because the borrower is perceived by the lender as high risk.
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 the credit card problem in the short term, but there is a risk of beginning a spending and borrowing cycle that deepens overall indebtedness.
Consolidation loans can aid consumers with a significant debt on more than one credit card. A debt consolidation loan allows them to pay credit cards 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. It can also enable the borrower to improve their credit score by making on-time payments.
Reloading and Debt Consolidation
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 they 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 0% 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.
Example of Reloading
Suppose Mark has three credit cards with outstanding balances of $3,000, $4,000, and $5,000 and monthly payments due of $200, $300, and $500, respectively. After negotiations with a lender, Mark combines the loans into a single card that reduces his monthly payments down to $600.