Debt Consolidation Loans
A debt consolidation loan is a single loan that pays off multiple other loans or debts. Typically, the loan is taken out to lower the total monthly amount paid toward unsecured debts. Debt consolidation loans may offer a lower interest rate and a lower monthly payment, enabling a person to free up some extra money that can then be used to cover other expenses.
The borrower may be able to lower her interest rate and secure a fixed interest rate, but this is not a guaranteed result. Further, even where the payment amount is lower than the borrower was previously paying, the reduction may be solely from the extension of the repayment terms. The term of the debt consolidation loan may be longer than the terms of all the loans it consolidates.
Although the borrower may experience immediate relief, she may actually sacrifice lower current monthly payments for a larger overall debt payoff. The temporary relief may be worth the adverse long term affects if the borrower is in present financial duress. The debt consolidation loan may enable the borrower to cover necessary expenses that would otherwise be left unpaid. The borrower is essentially planning her long term needs around meeting her short term requirements.
Debts That Can be Consolidated
A debt consolidation loan is used to pay off multiple high interest unsecured debts. Such debts include: credit cards, payday loans, medical bills, utility bills, unsecured loans, etc. Unsecured debts with low interest rates may not have to be included in the debt consolidation.
A debt consolidation loan cannot be used to pay off secured debts like a vehicle loan or home loan.
Requirements for a Debt Consolidation Loan
A debt consolidation loan is still a loan, which means that the borrower has to qualify for approval by the lender. Approval of these loans often requires a high credit score and a stable income. The lender wants to ensure that the borrower will be able to make the loan payment along with her other monthly bills. Also, the lender may not approve a consolidation loan for a borrower with a low total debt sum.
The interest rate on a debt consolidation loan is typically lower than on most credit cards or unsecured loans, but the lender may charge a fee for the service. The fee(s) may be required up front or may be paid through the loan. A borrower should educate herself as to the standard industry practices.
Some lenders require a borrower to secure the loan with the equity in her house or other assets, such as a vehicle. Not all lenders require a borrower to guarantee a loan with collateral, but it may be an option to lower the interest rate or increase the amount borrowed.
