Debt Consolidation Loan

Debt Consolidation is the act of combining all debts into one loan to pay off your current creditors. Debt consolidation does not reduce your total debt amount, but if done properly, it can reduce your monthly payments to relieve some of the pressure on your monthly budget.

There are two basic types of debt consolidation loans: unsecured and secured.

An unsecured debt consolidation loan can also be called a “personal loan” or a “signature loan.” This means that a lender loans you money based solely on your promise to repay the loan; you are not required to put up your property to secure the loan. However, your ability to qualify for an unsecured loan that will actually save you money greatly depends on your credit score. If you have excellent to very good credit, the unsecured option may work for you.

If your credit is less than perfect, and you own a home, a secured debt consolidation loan may be right for you. With a secured loan, the bank takes a security interest in your home, meaning that if you fail to make your payments timely, the bank has the right to foreclose on your home. This type of loan in generally referred to as a “home equity loan.” Interest rates on secured loans are certainly lower than unsecured loans, but be careful before you borrow money against your home to pay off your debts; you are converting what was previously unsecured debt into secured debt. This could cause you problems down the road if for some reason you are unable to make your payments, or if life circumstances force you to file bankruptcy, as you may not be able to discharge the secured debt as you would an unsecured debt.

If you have very good to excellent credit and are not struggling to make you monthly payments, an unsecured debt consolidation loan may be an excellent way to reduce your monthly payments, while also preserving your credit score. However, for most people who are in serious financial straights, a debt consolidation loan may cause more problems than it solves. Generally people who are in financial trouble will not qualify for an unsecured consolidation loan with an interest rate low enough to improve their financial situation. Therefore, the only consolidation option available is a secured loan. However, if you are already struggling to make your payments, taking a secured loan will probably not lower your payments very much, and will put your home at risk of being taken if you are unable to pay the loan.

If you would like to find out more about debt consolidation, the costs, the benefits, and the alternative, call one of Debt Resolution Partners' knowledgeable Debt Consultants today