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Guide to Debt Consolidation Loans

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What is a debt consolidation loan?

A debt consolidation loan is a loan that one takes out in order to pay off other debts. It usually provides borrows with a lower interest rate, as well as the simplicity of paying only one bill each month.

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Do I have to use my house as collateral?

You most likely will have to offer something as collateral to obtain a debt consolidation loan, and usually this is a house. However, people sometimes are able to secure their loans with even the most unusual of properties. Your lender will want your loan secured by some property of value with a title or deed.

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Can I get a debt consolidation loan if I do not own any property?

It will be difficult to obtain a debt consolidation loan if you do not own property, but it definitely is possible if your credit is good. If you are able to get an unsecured loan, your interest will be higher than it would be otherwise. If you do not own property and you have poor credit, obtaining a legitimate debt consolidation loan from a legitimate source will be very difficult, and you should be very wary of any offer that sounds too good to be true.

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Why do I need to know the terms of a debt consolidation loan?

A debt consolidation loan can be a wonderful thing to help you get out from under a mountain of debt, but you need to make sure you fully understand all of the terms of the agreement. Understand exactly what your monthly payment is and when it is due. Make sure you know what penalties you may face for a late payment. You also need to read all of the fine print on your loan. There are a number of unscrupulous business out there that will take advantage of you so it is important that you fully understand what you are getting into before you sign on the dotted line.

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What will my interest rate be?

Your consolidation loan interest rate should be lower than your current interest rates. If it is not, consider whether obtaining the loan for the ease of payments is worth it for your financial situation.

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What are the benefits?

Debt consolidation loans usually involve lower interest rates, so individual monthly payments likely will be less. Borrowers may have more funds for other purposes because of the money saved through cheaper payments. In addition, borrowers enjoy the ability to make a single payment per month instead of balancing multiple payments to multiple lenders.

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What are the potential costs?

Almost all debt consolidation loans are secured, so whatever property is attached to your loan is at risk should you fail to pay. In addition, lower monthly payments may cause your payback period to stretch, so you will be in debt longer than you would have been otherwise.

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When should I consider other options?

If you do not own any valuable property and have poor credit, then you probably have no choice but to consider other options. If you are able to obtain a loan but are offered a high interest rate because of your credit, then you need to decide if consolidating makes sense for your finances. Lastly, regardless of credit or interest rates, every potential borrower should consider their realistic ability to make payments with their home or other valuable property on the line.

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