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Debt Consolidation Loans
Debt management can
be a daunting task, particularly when a number of creditors are all
demanding their portion from an already distressed budget. High
interest rates add to the dilemma. For some individuals, a debt
consolidation loan may provide relief from the pressures of paying
several loans, reduce monthly payments and allow the individual to
become debt free faster. For others, this type of refinancing may
not be the best solution. The type of loan, the amount of debt, and
personal circumstances should all be considered before making the
decision to consolidate.
Debt consolidation loans may be either secured or unsecured loans.
Secured loans require collateral, the most common being a home
equity loan. Releasing the equity in a home is a risk, particularly
in the current economic climate. Property values could fall, leaving
the homeowner upside down on the mortgage. However, if there is
sufficient equity in the home and adequate income to make the
monthly payments, a home equity loan may offer a lower interest
option for consolidation than an unsecured loan. If a homeowner is
planning to re-mortgage within a few years, the consolidation loan
can be rolled over into the mortgage, but there may be an early
redemption penalty charged when the loan is paid. Typically, this
fee amounts to about one month’s interest charges.
Unsecured loans, also known as personal loans, do not require
collateral, but typically are made at higher interest rates, which
will equate to higher monthly payments than an equity loan. They are
in effect, a method of moving the debt from a number of unsecured
loans, such as credit cards, into one larger and, hopefully, lower
interest, unsecured bank loan with more manageable payments.
Debt consolidation loans can be the answer for reducing monthly
payments and paying off debt faster. However, they are probably not
the best option for individuals who have already consolidated their
debt a number of times, or if the loan will include still growing
debt from a previous consolidation. Debt consolidation should be
used to become debt free, not to make it easier to continue
purchasing on credit.