Category Archives: loan consolidation

Can Unsecured and Secured Debts Be Part of a Debt Consolidation Program?

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With the state of today’s economy and the dramatic increase in the cost of almost all goods and services, many individuals are now scraping along from paycheck to paycheck. This is a frightening situation, to say the least.

A debt consolidation loan is one solution if you can afford to make payments and aren’t completely underwater. These loans can be secured or unsecured. Your approval, loan amount and interest rate is usually be dependent on your credit score and the collateral for the loan.

Unsecured loans are just that. They are not secured by an asset or any type of collateral. They are typically granted to those with higher credit ratings. Secured loans are ‘insured’ by an asset of terms of value, such as a home, piece of real property, automobile or expensive piece of jewelry.

In the event that the loan defaults the collateral is seized and used to pay off the balance. Secured loans may be the only alternative for those individuals who are considered high risk. These are people who have gotten behind on their payments, or missed payments completely.

A home equity mortgage or refinancing is a common debt consolidation loan. There must be equity available in your home. Your credit rating must be solid and your income verifiable from a steady job. These days if you don’t meet all three criteria: equity, strong credit rating, and a job, the odds are your loan or refinancing won’t be approved.

A home equity line of credit is another option for a loan consolidation. However, the interest charges on these types of loans are higher than a refinancing. If you default on the line of credit, the loan company may start foreclosure proceedings even if you’re current on your first mortgage.

What Are the Risks or Disadvantages of a Loan Consolidation

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Loan consolidation or debt consolidation is a term used to define the merging of several loans or outstanding debts into one. Debt consolidation is a widespread practice for people who have taken out more than one loan and are having trouble keeping up with the paperwork involved, or are tempted by the fact that lenders that offer the option of loan consolidation also offer a number of advantages to go with said consolidation.

By loan consolidation, your debts would be paid off by the lending company you are making the consolidation deal with, and you are only left with one debt to pay off, to the aforementioned company. In some cases, this can be a good idea, it can decrease your monthly payments, help you get rid of a lot of unwanted paperwork and also give you a series of other benefits depending on the deal you strike with the lending company, but there can be a lot of disadvantages to loan consolidation as well.

One great disadvantage of loan consolidation is the fact that in order for your monthly payments to become smaller, the loan will get extended over a much longer number of years, which means that if before your loans would have been paid off in say, 5 years, now you will be paying back debt for 10. As such, you will not only be honoring monthly payments for a lot longer, but because of interest rates, the total sum you would end up paying back until the end will be a lot bigger.

The loan for a loan consolidation is usually a second mortgage on your home, or refinancing the home for it’s value plus enough to pay off the loans. That puts your losing your home at risk. If you miss a mortgage payment or two, your house could go into foreclosure.

Depending on where you were finding yourself with the other loans (towards the beginning or the end of the return interval), taking a loan consolidation can be negative because it would make you lose any advantages you might have had from your previous lender as a result of your long standing relationship.

Bottom line, loan consolidation can be a bad idea if you want to get rid of your debt as fast as possible or are feeling reluctant towards the idea of paying more money over time. It also makes it more difficult to sell your house because the price must be higher to cover the new loans.

Debt consolidation and your credit rating

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Debt consolidation loans are a solution for those faced with multiple debts. The proceeds of the loan are used to pay off each lender and creditor. Only payment is then made every month to the debt consolidation company, who granted the loan.

Many times that single payment is substantially less than the total amount that was being paid to the other creditors. This is especially true if the debt consolidation loan was used to pay off high interest credit cards. Most debt consolidation loans have a longer time period for repayment which decreases the amount of the monthly payment as well.

Debt consolidation doesn’t bring down your credit rating once you’ve paid off the debts you owed, because you’re paying the full amount. Eventually, if you keep all your other payments current your credit rating will improve.