I think there really is no such thing as a debt consolidation loan. It’s just a loan that you use to pay off your other debts. You could just as well call it a garden tractor loan or a remodeling loan.
The two kinds personal loans
There are two kinds of loans that can be used as a debt consolidation loan. They are secured loans and unsecured loans. An unsecured loan is basically a signature loan in that you’re not required to provide an asset as collateral to secure it. The opposite is a secured loan where you do provide an asset as collateral.
The most common type
When it comes to paying off or consolidating debts most people choose a secured loan. The reason for this is because it’s typically easier to get a secured loan–assuming you have an asset you can use as collateral. The asset most commonly used to secure one of these loans is a house. The loan can be a second mortgage or a Homeowners Equity Line of Credit (HELOC). Of course, you must have enough equity in your home that you can borrow whatever you need to pay off all your creditors. For example, if you want to pay off $30,000 in credit card debt, you’d have to have $30,000 or more equity in your house.
An unsecured loan
While it is possible to get an unsecured loan and use it to pay off your debts, these loans typically come with a higher interest rate because the lender is taking more of a risk. You might also find it difficult to borrow enough money to consolidate your debts if you owe $10,000 or more.
The advantages of a debt consolidation loan
The biggest plus of a debt consolidation loan is that your monthly payment will be less than the sum of the minimum monthly payments you’ve been making. The reason for this is because you’ll have more time to pay off the loan than to pay off your credit card debts. Whether you choose a second mortgage or a HELOC, you’ll probably have 7 years (or more) to pay back the money. You’ll be making only one payment a month vs. the multiple payments you’re probably making now. It can help you eliminate late fees and extra charges and takes a lot of the stress out of your life. And as long as you make your payments on time, you should see your credit rating improve.
The disadvantages of a debt consolidation loan
The first negative of a debt consolidation loan is that you may have a problem finding one. Lenders can be very cautious about lending more money to people who are already heavily in debt. If you do find one of these loans, it may not have a much better interest rate than what you’re paying now. It will take you much longer to pay back the loan than if you were just to pay off your credit card debt. You’ll most likely be putting up your house as collateral so that puts it at risk if you were to default on the loan.
The principal negative
However, that’s not the biggest negative of a debt consolidation loan. It’s the fact that it will do nothing to reduce your debt. If you had $30,000 in credit card debt before you consolidated it into a loan, you will still owe $30,000. All you’ve really done is move your debt from one set of creditors to another.
Why debt settlement is a better way to get out of debt
We believe that debt consolidation loans are not the best way to get out of debt and that debt settlement is a better solution. This is because it’s the only way to get your debts reduced, which means getting out of debt faster.
An affordable payment plan
Our debt counselors can work with your creditors to get your debts reduced as much as possible and with you to develop an affordable payment plan that can get you debt free in 24 to 48 months. Call our toll-free number for immediate help with your debts or fill out the form you’ll find on the right side of this page for a free estimate.
National Debt Relief helps people nationwide resolve $10k or more in unsecured debt. Our debt coaches negotiate with creditors on your behalf so that you pay a fraction of what you owe and can become debt free in as little as 24-48 months.
