The ABC of debt consolidation loans

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Author: Aisha Cristal

Article source: http://www.articledeshboard.com/. Used with author's permission.

Consolidation is typically defined as a process of merging your multiple high-interest loans into one low-interest, convenient monthly payment. It is a quick, easy way to get out of the debt burden and lower the borrower's monthly payments. Simultaneously, the borrower can use the saved money for better things.

Loans for consolidation purpose are of two types. They are home-equity lending (also referred to as a secured loan) and Personal lending (unsecured loan). Home Equity loans are given to borrowers against their home to consolidate their debts. The borrower can get one monthly payment with, usually, a pretty good interest rate between 9-12%. This option is definitely beneficial for someone who recently took a cut in pay, divorced, unemployed, or just overspent their income and the debt repayment became too great. However, the negative aspect of these loan plans is that the borrower puts his home as security—if fails to pay this loan, he may find himself on the street.

On the other hand, debt consolidation loans of unsecured type typically have a higher interest rate, 12-15%, but do not require a security. The bank is taking a greater risk that you will repay the money borrowed, so the fees (interest) are higher.

Many people trapped in the debt burden often feel confused when they find themselves in heaps of debts. The underlying points can clear their confusion.

Who needs debt consolidation?

Debt Consolidation loans should only be considered as an alternative to total extreme conditions like bankruptcy. If you are already behind on your payments, receiving calls from collection agencies or attorneys, or are struggling to pay your credit card bills every month then you may be a candidate for debt burden relief.

Who doesn't need consolidation and debt management plan?

Debt Consolidation should not be considered as a magic wand to get out of paying debts. Yes, the lower monthly payment may sound attractive and the expert salesmen from debt management companies will be very convincing in telling you how much you deserve the extra money every month and how much fun you can have spending it. The truth is, however, in some cases consolidation may end up costing the borrower more than if he just pay off his debts himself.

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