Consolidation Loan, a Good Idea?

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Debt consolidation loans have become a popular way to repay unsecured debt. Most people use debt consolidation loans because they have multiple debts, they’re looking for a lower interest rate and they want to reduce their monthly payments. However, there are several risks involved with debt consolidation that need to be examined before beginning the consolidation process.

A debt consolidation loan is simply combining all unsecured debts into one loan by either taking out a secured or unsecured loan. A secured loan means there is some asset or form of collateral backing the loan which can be liquidated if the borrower stops making payments. The most typical form of collateral used for a secured loan is a home. An unsecured loan is a loan that is only backed by the consumer’s signature and not by collateral. Interest rates for unsecured loans are usually higher because the risk is higher for the lender.

There are several loans available to consolidate debt:

Home Equity Loans

Secured Loans

Unsecured Loans

Consolidating Debt with Home Equity Loans

Home equity loans can be used to consolidate debt. The benefit of a home equity loan is a much lower interest rate than an unsecured debt, such as a credit card. Yet because the term length is longer for a secured loan, the borrower ends up paying more than the original principle of the debt. The home owner also jeopardizes the security of their home by increasing their monthly payments because if they are unable to make the higher payment, the lender can foreclose on their home.

Consolidating Debt with Unsecured Loans

Unsecured loans are also used to consolidate debts. Typically, unsecured loans have a fixed interest rate that is somewhat lower than the interest rates of the other unsecured debts. The two primary advantages are a lower interest rate and the convenience of only one payment. However, most lenders offer a short-term low interest rate that can eventually balloon to more than 20 percent. Lenders may also require high credit scores and other strict qualifications for unsecured loans since the only way to recover the borrowed amount, should the borrower default on the loan, is to take legal action.

Consumers contemplating debt consolidation should first consider the risks involved. A viable alternative to debt consolidation is debt settlement. Having a professional negotiate and reduce your overall debt can save you money and prevent risking your home to pay of debt.

Article Source: http://www.articles.ask-me-about.com

Author Bio: Scott Sumerford is a graduate of the University of Texas at Arlington. While attending UTA, he worked as a writing center tutor. He also has several years of experience in the financial industry and has written on a myriad of financial issues. Click here to view more articles by this author on credit card debt

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