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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.