Consolidation Loan Basics

17-Aug-2007

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 lender:

• 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. This will help discipline your financial management.
• Interest payments may be smaller (compared to your other loans and debts), so the debt burden is lighter.
• An extended term of repayment for a consolidation loan will further ease your debt burden per month, leaving you more funds for other needs.
• People who are filing for bankruptcy can take advantage of special interest rates accorded during bankruptcy filing which may also lighten the debt burden for you.
• You can choose a consolidation loan that has a fixed interest rate, so that you will not have to shoulder variable interest rates that fluctuate from time to time.
• You needn't deal with multiple lenders and creditors because you will only be dealing with the consolidation loan company that bought your existing debts and provided you with a debt consolidation loan.

Consolidation Loan Disadvantages

A fact about consolidation loans is that they are not your ticket to financial security. They do have some disadvantages, like:

• You have to pay fees to the consolidation loan lender, which may be substantial compared to the cost of your earlier unpaid loans. You have to be good at computing the costs of either side to decide which option will be more financially beneficial to you.
• If you fail to keep up with payments for your consolidation loan, the lender has the right to sell of your security, so if you put up your home as security, you may be left homeless.