A debt consolidation loan is a loan obtained from a bank, credit union, or finance company to pay off your outstanding debts and "consolidate" all your unsecured debt into one big loan.
Debt consolidation loan has its advantages and disadvantages.
Types of Debt Consolidations Loans
There are two types of debt consolidation loans: Secured and Unsecured.
Getting unsecured debt consolidation loans are hard to get and are usually given at a higher interest.
Getting a secured debt consolidation loans are easier to get then unsecured debt consolidation, they require security (collateral). Here are what is considered as security: newer model vehicle, boat, term deposit or another asset that can easily be sold or liquidated by the bank if you don't make your Debt Consolidation loan payments.
They require a good credit score and enough income to qualify.
Advantages of a Debt Consolidation Loan
✔ You only have one monthly payment to worry about
✔ You often consolidate at a lower interest rate which saves you money on interest payment
✔ You debt will be paid off in 3-5 years
✔ Debt consolidation loans have feeds associated with them and are usually very low
Disadvantages of a Debt Consolidation Loan
Debt consolidation loans work if you:
✔ Are disciplined with your money
✔ Develop a budget
✔ Refrain from adding new debt
If you are not disciplined, they give the illusion that you have dealt with your debt.
Debt tends to grow back. Secured debt consolidation loans convert unsecured debt to secured debt. In case of a default, you could lose your assets.
The Challenge with an Unsecured Debt Consolidation Loan
Banks rarely approve unsecured debt consolidation loans. Those who get approved have a high Net Worth (Your Assets value minus all your debts) and a good or an excellent credit score or a co-signer who has a very high net worth and a very strong credit score.
Debt elimination plan would serve better than a debt consolidation loan.