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What are Debt Consolidation Loans?

We see the advertisements on television all the time. "Consolidate your debt," they say, "make one low monthly payment! Cut up those credit cards!!" Ads like these are advertising debt consolidation loans; loans intended to pay off all or most of a borrower's outstanding debts and "consolidate" them into the one loan with one, hopefully lower, interest rate. The name "debt consolidation loan" pretty effectively betrays what the purpose of the loan is, but says nothing about how these loans really work.

Debt consolidation loans explained

Debt consolidation loans can be obtained from virtually any lender, but they have become, in recent years, the domain of secondary finance companies. Companies like Ameriquest and HFC do a strong annual business in offering debt consolidation loans. Of course, to obtain a debt consolidation loan, a borrower must have some sort of collateral; an attachable asset that can be used to secure the loan. In nine out of ten debt consolidation loans that asset is the borrower's home. When the loan is obtained, a lien is placed against the borrower's home in the next available position (typically the second, unless there is already an existing second mortgage) and the debt consolidation loan is basically the same as a home equity loan or second mortgage. Other types of collateral can be used in some cases, but with a finance company as the lender, the source is invariably home equity.

Why choose a debt consolidation loan?

The people who benefit the most from debt consolidation loans are those carrying high interest debt such as multiple high balance credit cards. The loan pays these balances off and the borrower now makes one monthly payment to the lender at a lower interest rate. In theory a debt consolidation loan is a very good idea. It can help clean up shaky credit and can save people thousands in interest. Unfortunately human nature often prevails and the borrower with a fistful of zero balance and high limit credit cards may quickly find herself at the mall climbing back into the hole. It is recommended that when taking out a debt consolidation loan the borrower cancel her credit card accounts save one or two which can be used in emergencies.

Where to find cheap debt consolidation loans?

As mentioned earlier, there are a number of companies which specialize in debt consolidation lending. These finance companies typically charge higher interest rates than most banks, but few banks deal in debt consolidation loans unless the amount is substantial (most banks do home equity lending in amounts of ten thousand dollars and above). The borrower's credit rating is a factor in determining the cost of a debt consolidation loan as well. Persons with bad credit can usually expect to pay higher interest rates. Those rates will probably be much lower than those on the credit cards though.

Online lenders are worth a look when seeking a debt consolidation loan, but the borrower needs to be wary of lenders who prey on those with poor credit, charging high rates and incredible fees and other costs hidden in the language of the loan contract. Always be sure to read the entire agreement when taking out a debt consolidation loan. Get a free debt consolidation quotes here!


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