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How's Debt Consolidation Loans Work?
Debt consolidation itself is a process that combines all your debts into one debt for easy debt management. You can consolidate your debts without a loan; you get help from a consolidation company who will collect one payment check from you and help you to distribute them to your creditor. But, in most case, a debt consolidation loan will be involved to get rid of your old debts with a new loan.
In the process of consolidating all your debt with a consolidation loan, you will need to apply a loan. It can be secured loan or unsecured loan with the amount that is enough to payoff your consolidated debt.
Refinancing your mortgage, home equity loan and home equity line of credit are among the secured loans that use your home equity as collateral to cash out money for you debt repayment. Any personal loan that does not required any collateral is an example of unsecured debt consolidation loan. Basically the loan amount for unsecured loan is lower and has higher interest rate and shorter repayment period if compare to a secured debt consolidation loan.
Based on your credit history, you may not be eligible to apply for unsecured debt consolidation loan if you have bad credit record. In this case, secured debt consolidation loan could be your only option.
Quick Tips for Debt Consolidation Loans
- Do the Income Worksheet and Personal Budgeting Plan so you know how much of a payment you can afford.
- There is no fee, or obligation, when you apply online for a consolidation loan, so you can shop around for the best rate, and payment terms, you can get.
- Allow yourself some leeway in your budget when calculating payments on consolidation loans. This will help you to pay it off faster and save interest.
If you own a home, vacation property, or other real estate that can be used as collateral, you may qualify for a first or second mortgage, home equity loan, or refinance of an existing mortgage to consolidate your debt.
- + Rates on secured loans are lower
- + Ability to borrow more money
- + Smaller monthly payments
- - Longer repayment terms
- - Risk of losing house if unable to maintain payments
If you don't own real property, you may qualify for personal loans that can be used to consolidate debts.
- + Unsecured loan, you don't risk your assets
- + Shorter payment terms
- - Higher monthly payments
- - Higher interest rates
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