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Consolidation Loan Basics

Let's tackle consolidation loan basics by defining what a consolidation loan is. A consolidation loan is more popularly known as a debt consolidation loan. It merges and consolidates different debts from different lenders into one single payment. With the proceeds of a consolidation loan, you will pay off the balance of all your outstanding debts, and instead of paying multiple payments each month (all with high interest rates), you will pay a single, low interest monthly payment to your consolidation loan lender.

How to Get a Consolidation Loan

Consolidation loans are provided by financial institutions like banks and by specialty consolidation loan lenders. To secure a consolidation loan, you'll be required to meet the following criteria and provide the following materials, as specified by your lenderL

  • A genuine copy of your monthly income (this is the basis for computing repayment amounts per month)
  • A breakdown of your budget per month (out of which you must allocate a certain amount for repaying the debt consolidation loan)
  • The existence of collateral under your name (which will act as the security for your consolidation loan)
  •  The presence of a co-guarantor or co-signor (who will absorb payments for the consolidation loan in case you fail to pay on time)

Types of Consolidation Loans

Consolidation loans come in both secured and unsecured varieties. Here is a brief description of both types:

  • Secured consolidation loans – You will need a form of security (such as real estate or your car) to be posted before you get your loan. Its advantage over an unsecured consolidation loan is that interest rates will be lower. Another advantage is that you will be given a longer term in which to repay the loan. However, if you fail to meet payments on the consolidation loan, the security you posted will be sold by the lender.
  • Unsecured consolidation loans – With an unsecured consolidation loan, you will not be required to provide any collateral or security. The catch, though, is that you will be required to pay a higher interest rate because you are a riskier borrower than a person taking out a secured loan.

Consolidation Loan Benefits

A consolidation loan offers many benefits to a debt-ridden individual, such as:

  • Your cash outflow will be regulated because you are obligated to make payments on your consolidation loan.