Debt Consolidation Loans

If you're like many Americans, you may be considering a debt consolidation loan to organize your debt commitments.  We mentioned in our article on credit card debt statistics, that you're not alone if you find yourself with growing concerns over the amount of personal debt you've accumulated.

The good news is that if you're looking for a consolidation loan, then you probably realize the need to take more control over your debt.  Keep in mind that consolidation loans are a financial commitment, and you need to make sure spending is under control before seeking out this kind of loan.

Personal Debt Consolidation Loans

There many advantages of debt consolidation loans, but the commitment on these loans is very different from those of outstanding credit card bills, or the balance on a credit card.  By taking this debt and organizing them into a consolidation loan, you are removing all of the risk associated with default on each of those individual loans (credit on any card is essentially an unsecured loan), and putting them all in one place:  the consolidation loan.

As part of that process, the smaller risks of default that each merchant or creditor has with you are now transferred to this larger personal loan.  The lending institutions writing these loans want to make sure they are protected in some way for assuming all of this risk.  That is why debt consolidation loans are usually secured loans with collateral; most likely your home or some other valuable asset.  We'll talk more about this important nuance later.

Lower Interest Rate Loans

The single biggest advantage a debt consolidation loan offers consumers is lower interest rates on debt owed.  Lenders can afford to offer low interest rates because the fixed costs to administer the loan, such as processing the application, can be spread out over the larger dollar amount of these loans.

In addition, most consolidation loans are secured loans, meaning that the lending institution has recourse in the event of default.  A secured loan lowers the overall risk of nonpayment to the lender, and allows them to offer relatively low interest rates to the debtor.

Monthly Debt Payments

With a larger number of smaller loans, you also need to be careful in managing your payments to each lender.  For example, if you're making minimum payments on a credit card, then you need to make sure you have the minimum covered each month, or run the risk of penalties or bad marks on your credit history.

A debt consolidation loan pays off all those smaller loans, so you don't have to worry about minimum payments or calls from three or four collection agencies when you miss a payment.  All you need to focus on is making one payment on the loan each month.

Another advantage of having one monthly payment is that it allows you to see just how much money you owe various creditors.  Most people intuitively understand that they have a lot of debt.  But until someone adds it all up, they might not realize just how much money they owe creditors.

Credit Reporting

We alluded to this earlier when we talked about tracking all those individual payments you make to each creditor.  Almost all credit card companies report an individual's payment history to credit reporting agencies.  If you're missing monthly payments on some of those credit cards, then you're probably affecting your credit report negatively.

A consolidation loan makes it easier to manage your monthly payments, and should help you maintain a better credit score.  That's important when you're trying to get a car loan, mortgage, or personal loan.

Disadvantages of Debt Consolidation Loans

In many ways, the disadvantages of debt consolidation loans mirror the advantages of these loans; only they are slightly magnified.  All of the advantages of having a larger loan come with some pretty big risks if you don't manage this loan the right way.

Risk of Default on Loans

The fact that most debt consolidation loans are a secured loan means you can find low interest rates, but it also means the lender has collateral they can attempt to seize if you default on the loan.  For most individuals their homes will be used as collateral for a consolidation loan.  That makes this type of loan arrangement very similar in nature to home equity loans, which are sometimes referred to as a debt consolidation mortgage loan.

This is one of the reasons why debt consolidation loans are such a big financial step.  On the one hand you are attempting to gain control over your debt.  On the other hand, you need to be willing to put your house or home at risk.

Unsecured Consolidation Loans

While it is possible to get an unsecured debt consolidation loan, just be aware that lenders will be very selective.  You're going to need to have a good credit rating, and a reliable source of income.  That combination would be uncommon among most consumers looking for a debt consolidation loan.

If you find yourself in the situation where you have a bad credit rating, and you're looking for a debt consolidation loan, then just be aware that the chances of you getting an unsecured consolidation loan are very small.  You have two factors working against you:  poor credit and you're not willing to put up any collateral.  Lending institutions would view this as a very risky loan.

Credit Reporting

In the same way the consolidation loan keeps all of those smaller creditors satisfied, it also draws attention to the larger loan you now have outstanding.  If you're making your monthly payments in a timely fashion, then you have nothing to worry about.  But if you miss a payment, or are chronically late making payments, then be prepared for negative credit reporting and its implications for new loans in the future.

Finding Debt Consolidation Loans

As credit card debt continued to grow, so did the sophistication and the number of solutions available to consumers.  Today, finding debt consolidation loans is a pretty simple process, but finding a reputable lending institution is a little more difficult.  That being said, here are a couple of tips for finding a reputable debt consolidator:

Christian Debt Consolidation

We have an entire article dedicated to Christian Debt Consolidation.  While we all might want to believe that the word Christian automatically means you can trust these companies to do the right thing, that's simply not true.  When it comes to money, some companies will try anything, and that includes using the term Christian to attract new customers.

Non-Profit Debt Consolidation

We also have an article dedicated to nonprofit debt consolidation that includes some of the same information we find with Christian debt consolidators.  These loans are very profitable, even for these nonprofit organizations.  These companies have a way of making the profit seem more like a donation.  Our complete article on this topic gives you tips on how to find reputable firms.

Sallie Mae Consolidation Loans

In addition to providing students with a way to manage their loans, Sallie Mae also offers former students consolidation loans.  If you're trying to consolidate student loans, then you might want to take a closer look at Sallie Mae's offerings.  You can choose a convenient loan repayment option including level payments, graduated, extended, and even an income-sensitive plan.  Sallie Mae even offers private student loan consolidation if:

• You have a private student loan from a bank or credit union
• You have at least $5,000 in student loans
• You have a good credit rating or a cosigner with a good credit rating
• You already graduated, or you will be graduating from a postsecondary program

Banks and More Traditional Lenders

Don't be surprised if your best debt consolidation deal comes right from a traditional lender like a local bank.  When comparing interest rates and loan terms, remember that homeowner's may be using their homes as collateral on the debt consolidation loan.  For this reason, you may want to consider a second mortgage, a refinance loan, or a home equity loan instead.

Consolidation Loan Calculators

Finally, if you'd like to see just what a consolidation loan might cost you each month, we have several online calculators that can be helpful when evaluating your debt consolidation options including:

• Consolidation Loan Calculator - this calculator allows you to bundle existing debt into a consolidated loan, and see what the monthly payments would be for that loan.
• Refinance a Mortgage - if you have an existing mortgage, and are thinking about using refinancing as an option, then try this online calculator.
• Credit Card Payoff Calculator - if you have a lot of credit card debt, and want to see what it might take to pay it off, then this calculator can help.
• Debt Reduction Calculator - similar to the credit card payoff calculator, this tool helps you to build a plan to reduce your debt.

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