|
 If you're like many Americans, you may be considering a debt consolidation loan as a one way of organizing all of your current debt commitments. As we've mentioned in our article on credit card debt statistics, 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 that you need to take more control over your debt. Keep in mind that consolidation loans are a pretty big step and you should make sure that you've got your spending under control before seeking out this kind of loan.
Personal Debt Consolidation Loans
There are quite a few advantages of debt consolidation loans, but you need to understand that the commitment on these loans is very different from those of outstanding credit card bills or the balance on a credit card. By taking all of 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.
What happens in this process is that all of 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 of 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 later.
Lower Interest Rate Loans
Probably the single biggest advantage a debt consolidation loan offers consumers is lower interest rates. 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 to the lender and allows them to offer relatively low interest rates to the consumer.
Monthly Debt Payments
With a larger number of smaller loans, you also need to be more careful in managing your payments to each lender. For example, if you're used to making minimum payments on a credit card, you need to make sure you've got 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've missed something. All you need to focus on is paying the one 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've got a lot of debt, but until someone adds it all up, they might not realize just how much debt they really have.
Credit Reporting
We alluded to this earlier when we talked about tracking all those individual payments you need to make to each creditor. Almost all credit cards 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. With all of the advantages of having a larger loan packaged nicely for you, come 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 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.
If you find yourself in the situation where you've got a bad credit rating and you're looking for a debt consolidation loan, just be aware that the chances of you getting an unsecured consolidation loan are very small. You've got two things 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 that the consolidation loan keeps all of those smaller creditors satisfied, it also draws attention to the larger loan you've now got outstanding. If you're making your monthly payments in a timely fashion, then you've got nothing to worry about. But if you miss a payment here or there or are chronically late making payments, then be prepared for negative credit reporting and its implications for loans down the road.
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 on finding a reputable debt consolidator:
Christian Debt Consolidation
We've got an entire article dedicated to Christian Debt Consolidation. And 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, including using the term Christian to attract new customers.
Non-Profit Debt Consolidation
We've also got an article dedicated to nonprofit debt consolidation that tells some of the same story we see with Christian debt consolidation. These loans are very profitable, even for these nonprofit organizations because they 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. So if you're trying to consolidate student loans, 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've got a good credit rating or a cosigner with a good credit rating.
- You've already graduated or you will be graduating from a postsecondary program.
Banks and More Traditional Lenders
Don't be surprised if you best debt consolidation deal come 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've got several online calculators that can be helpful when evaluating your debt consolidation options including:
- Consolidation Loan Calculator - this calculator allows you too bundle existing debt into a consolidate loan and see what the monthly payments would be for that loan.
- Refinance a Mortgage - if you've got an existing mortgage and are thinking about using refinancing as an option use this online calculator.
- Credit Card Payoff Calculator - if you've got a lot of credit card debt and what to see what it might take to pay it off, 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.
About the Author - Debt Consolidation Loans
Copyright © 2005 - 2007 Money-Zine.com
Debt Consolidation Resources on the Web |
Home 
