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Debt consolidation is taking out a big loan to cover one ormore smaller loans. In essence, you borrow an amount of money largeenough to pay of the loans you have. Rather than having many smallloans, and many payments, and multiple interest charges, you end upwith only one loan, one monthly payment, and one ineterest charge. Thiscan, in the long run, save you a great deal of money in interest. Italso makes it easier to make payments, as you do not have remember tosend a separate payment for all of your obligations.
There are two very common types of debt consolidation. Both of them areloans. One of them is an unsecured loan, taken out to cover arelatively low debt burden. The other common debt consolidation loan isa home equity loan. This type of loan often allows you take out moremoney, as it is secured by your home, to consolidate a greater amountof debt.
An unsecured debt consolidation loan is usually made in order to coveramounts of debt totalling less than $10,000. Much of the time, you willbe hard pressed to even cover that much debt with an unsecured loan. Atany rate, it is unsecured because you offer no collateral to cover. Ifyou own a car, it is possible to turn that unsecured loan into at leasta partially secured loan. But ifyou default, you lose your car so thatthe lender can recover some of the money lent to you. You can expect topay a higher interest rate on an unsecured debt consolidation loan.Rarely is there any allowance made for you to have extra money as well.Most lenders of this type of loan actually pay off your existingbalances directly. You never actually get the money in your hands. Yourdebts are paid off, and now you make one payment the new debt holder.
A home equity debt consolidation loan is based upon the value of theequity in your home. If you have a great deal of equity, you can get alarger amount of money to pay off debts, sometimes tens of thousands ofdollars. What happens is that you refinance your home for more thanwhat you have left on your mortgage. If you have a home that is worth$100,000, and you've paid half of it off, you can refinance theremaining $50,000 and add any number up to $100,000. If you need$30,000, you refinance for $80,000. The $50,000 pays off your oldmortagage and you keep the remainder. This is because the home is anasset that can be sold to recoup any losses resulting from a default.Many people use the equity in their homes to consolidate debt, and thenmake sure there is a little left over for a trip or home improvements.One should be very careful not to borrow more than needed, as this cancause problems. Some unscrupulous lenders and scammers will actuallyencourage you to take out a bigger loan than you can afford. When youdefault they can come in and take your house. You should always beconservative in borrowing to prevent loss of your home.
Debt consolidation can help you out of a tight spot, but you should useit as part of a plan to ultimately rid yourself of debt, rather than asan end in itself.
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