Debt Consolidation Loans

The Truth About Debt Consolidation Loans

Sounds like a movie title, doesn't it? Okay, maybe not quite. Debt consolidation loans have their good and bad points, just like anything. Who in debt hasn't dreamed of being able to write checks to pay off each creditor in full? But debt consolidation loans make that dream a reality. When you get a debt consolidation loan, you get a check for the amount it will take to pay each creditor off in full. What a great feeling! But then you are still in debt. The difference is you're only in debt for five more years instead of 20 or more. This is because debt consolidation loans don't charge high interest rates or finance charges. Typically the interest rate on debt consolidation loans is in the single-digits, in fact.

But few people can qualify for debt consolidation loans. First of all, some people in debt have credit problems. That doesn't mean these loans are out of the question for these people, but the interest rates won't be quite as low. It will still be a lot better than the interest on credit card debt though. Then there are people in debt who have good credit, they're just "overextended." This means there's only a certain amount you can borrow, and that may or may not cover the amount you owe. This ends up not being very helpful at all. After all, you may be able to get a loan to pay off one or two creditors, but you still have the others and your loan payment. Ideally, you'd be able to eradicate all your credit card debt with one loan, then make one monthly payment to the debt management company. Convenience and savings!

Then there's the issue of collateral. Debt consolidation loans simply aren't issued to people who don't have collateral. The problem with that is that most people in debt don't actually own anything. There's a small chance their car is paid for, and if that's the case, it might provide enough collateral to enable you to get the loan, provided it's worth at least as much as you're borrowing. The reason for this is because the lender has to have a way to recover their money if you stop making your payments. You'd want that same assurance in their shoes.

Homeowners an use their house for collateral to get debt consolidation loans, but they actually have a better option--a debt consolidation mortgage. If you're a homeowner, don't even consider getting a debt consolidation loan. Not when you can get a debt consolidation mortgage. It's a much better option.

Bottom line: A debt consolidation loan can help you get out of debt, but it's hard to qualify.

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