What is a Debt Consolidation Loan?
All loans require good credit today. Even a debt consolidation loan. If you have never taken one out, a debt consolidation loan is used to pay off many creditors at once and leave you with one low interest loan to handle.
It can be used to bundle high interest credit card balance, car loans, personal loans and student loans. In fact, there is a special government consolidation loan department that will help consolidate your student loans.
As suggested above, the idea of a debt consolidation loan is to obtain a reduced interest rate on your debt and extend the payments. Hopefully, you will end up with a one payment that is lower than the payments of the loans you just consolidated, combined.
Debt Consolidation Loan Example
The main point of getting a debt consolidation loan is to get a lower interest rate. So, let’s say you owe $10,000 spread out among three credit cards and a car loan. The interest rates on the balances are 15.99%, 19.99%$, 10.99% and 21.99%. The idea would be to borrow $10,000 at an interest rate below 10% to make this work for you.
Let’s say that the combined monthly payment of these debts is $300. You might want to reduce the payment or at the very least keep it the same so you pay the loan of in a shorter amount of time.
Debt Consolidation Lenders
You can apply for a secured or unsecured loan.
- Secured Loan: This means that you put up some personal assets to guarantee the loan. This could mean your home, car, boat or other asset that you have. The danger is that if you miss payments, you could lose that asset. The plus side is that you will stand a better chance of getting approved for the loan because you are putting an asset up as collateral.
- Unsecured Loan: An unsecured loan is where your good credit and income is all that is needed to secure the loan. These are tougher to get. A good credit history is essential to get approved for one of these loans.
You can consolidate your debt using a home equity loan, loans from banks or credit unions, your 401k or savings and loan companies.
If you have trouble obtaining a loan you might try and get a co-signer. If the co-signer has good credit it could help you get approved. The co-signer needs to be aware, however, that if you don’t pay, they are on the hook for the debt consolidation loan.