What is a Debt Consolidation Loan?
A debt consolidation loan enables you to borrow money to pay off your current debts. It differs from debt management, which is where you negotiate affordable repayment terms with the companies you owe money to.
The benefits of debt consolidation loans
A debt consolidation loan can help you move all your debts onto the one loan, thereby reducing your monthly payments to a more manageable level. If you are able to repay your loan in a timely manner, it will also positively impact your credit rating, and if you are incurring high-interest rates on your existing debts, it will help you to reduce the amount of interest you pay.
The two main types of debt consolidation loans
There are two main types of debt consolidation loan: secured and unsecured. A secured loan requires you to secure your loan against property. This means that if you fail to repay your loan, your lender will be able to sell your property to recoup your outstanding debts. If you have a previous history of bad credit or have several large debts to your name, a lender may only consider offering you a secured loan.
An unsecured loan is less risky than a secured loan, as it does not require you to secure your loan against your property. However, you may only be able to acquire an unsecured loan if you have a history of managing your finances responsibly. If you find yourself in a situation where you are struggling with your finances and you fail to keep up with your unsecured loan repayments, your lender will not be able to sell your property. However, your lender may put a black mark on your credit rating, which may make it more difficult for you to acquire affordable lines of credit in the near future.
The cost of debt consolidation loans
A secured loan is usually cheaper than an unsecured loan, as your lender will be able to sell your property if you do not pay the money back. Since you will pose less of a risk to your lender, you will be able to secure a lower interest rate on your loan.
Whether you wish to take out a secured or unsecured loan, you will find a wide range of loans available for the taking.