Debt Consolidation Loan
Sometimes when people are in debt, they get a debt consolidation loan. But some people don't know what a debt consolidation loan is. We'll explain it to you here.
Debt Consolidation Loans Explained
As you might guess, a debt consolidation loan is a loan given to you to pay off your unsecured debts, such as credit card debt, student loan debt, medical bills, etc. To get a debt consolidation loan, you have to have collateral, such as a car, boat, RV or anything that's paid for in full that is worth the amount of the loan you get. This is for the lender to have a reassurance that if you default on the loan, they will have something they can sell to get their money back.
If you don't have any collateral besides your house, some lenders might suggest that you use your house as your collateral. But if you default, your bank gets your house, and that's worth a lot more than your debt consolidation loan (hopefully). Then you'd still be in debt and be homeless. So you'd be worse off than when you started. Besides, if you're a homeowner, a far better idea is a debt consolidation mortgage. (We'll explain more about those later.)
Some people think a debt consolidation loan just replaces one set of debts with another. That's true, but your loan will have a much, much lower interest rate--think single digits--and you will have it paid off in five years. So you'd be debt free in five years instead of the 13 years or more it would take you on your own.
If you don't have collateral or a house, debt consolidation loans might not be the right debt management program for you. That's okay though, because you can still enroll in a debt consolidation program. Through debt consolidation, a debt consolidation company contacts your creditors to get your interest rates (and sometimes your balances) reduced. Then they combine all your balances and you make one monthly payment to the debt consolidation company instead of a bunch of monthly payments to your creditors. (The debt consolidation company makes sure your creditors get paid.) As a result of the reduction, you can be out of debt in five years! And once your creditors get a few on-time payments, they might even agree to "re-age" your accounts, meaning they will report them as current, thereby instantly improving your credit.
Another benefit to debt consolidation programs or any other debt consolidation solution is that if your creditors are harassing you, they will be legally required to stop once you enroll in one of these programs. What more could you want?
All material copyright © 2008 About Debt Relief. All rights reserved.
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