Things to know about debt consolidation loans

Debt consolidation enables you convert your high-interest debts to lower-interest payment. There are other advantages: you won’t be late for monthly payments; you can decrease costs by lowering the interest rate on debts and reducing monthly payments, you can pay off fewer and save money.

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The simplest definition of debt consolidation is the method of a debt refinancing merging all debts into a single place to keep debt in check. People generally prefer to use debt consolidation loans for high credit card debts, medical bills, refinancing personal loans and payday loans. Debt consolidation can be considered not only for individuals with high consumer debt, but also for Government debt.

Debt consolidation enables you convert your high-interest debts to lower-interest payment. There are other advantages: you won’t be late for monthly payments; you can decrease costs by lowering the interest rate on debts and reducing monthly payments, you can pay off fewer and save money. So, debt consolidation is exactly a good idea for good credit. But debt consolidation for bad credit may not be a good idea.

Types of Debt Consolidation Loans

Debt consolidation types help you see how debt consolidation loans work. There are two debt consolidation loans: one is secured debt consolidation, and another is unsecured debt consolidation. Main difference between secured and unsecured is to use collateral or not to use.

Secured Debt Consolidation Loans

Secured debt consolidation is exactly like a home loan and uses a collateral. A secured debt consolidation loan helps you save money while you pay off, because it has lower interest rates.

House equity for debt consolidation loans seems to be an advantage because it offers a fixed interest rate and the interest paid can be deducted from the tax, but it also has a disadvantage. If you cannot pay off, your home may be confiscated. Moreover, repayment terms can be longer than 10 years. Over this period, the home can cheapen and having much more debt is a probability.

Unsecured Debt Consolidation Loans

Unsecured debt consolidation loan has both advantages and disadvantages compared to secured debt consolidation. Making application is easier, collateral doesn’t be required and there is not asset risk, credit score can be as low as 585 and there are not too much approval requirements, but obtaining from a lender is difficult, and the interest rates in unsecured debt consolidation loans are higher.

Didem Sagindik
is a Sr. Research Analyst at Financhaser, focusing on Loans. She has PhD on Business Management.

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