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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