Debt happens. When you get too far extended to multiple lenders, recovering can feel like trying to dig your way out of quicksand. This is where a debt consolidation loan comes into play.

What is a Debt Consolidation Loan?

A debt consolidation loan is a type of financing extended to those with multiple debts. It allows you to consolidate (aka combine) your debts into one new loan.

Typically, these loans are extended to individuals with multiple credit cards who are struggling or unable to make their monthly minimum payments. However, debt consolidation loans can also be used to consolidate various types of personal debt above and beyond credit cards.

What is the Goal of a Debt Consolidation Loan?

Saving you money!

This should always bee the goal of a debt consolidation loan. Rob Beckner, one of our Fairway Bellevue Loan Officers, said, “I always try to look at the big picture. If a borrower has one (or multiple) high interest loan and he/she can get a cash-out refi for his/her home, debt consolidation makes sense.”

What are the Benefits of Debt Consolidation?

  • Saves You Money – Rather than paying a high interest rate on one or multiple loans, a debt consolidation loan should lower your interest rate and ultimately save you money.
  • Reduces Collection Calls – If you are in debt, you know all too well the endless creditor calls. A debt consolidation loan pays these loans off, reducing or eliminating creditor phone calls.
  • Creates One Monthly Payment – Rather than struggling to make multiple payments to different creditors, a debt consolidation loan allows you to make one monthly payment to a single creditor.
  • Improves Credit Score – While you won’t see an immediate improvement, by making timely payments you can improve your credit score over the long haul.

Are All Debt Consolidation Loans the Same?

No. There are two kinds of debt consolidation loans: secured and unsecured. Secured debt consolidation loans are associated with physical assets such as your house, car or piece of property. These physical assets are used as collateral in the event you default on your loan.

Unsecured debt consolidation loans are not tied to an asset. They are largely based on your credit history.

Secured Debt Consolidation Loan Positives

  • Higher potential borrowing amount
  • Easier qualification
  • Lower interest rates
  • Potential tax deductions

Secured Debt Consolidation Loan Negatives

  • Longer repayment terms
  • Risk of asset loss

Unsecured Debt Consolidation Loan Positives

  • No risk of asset loss
  • Shorter repayment terms

Unsecured Debt Consolidation Loan Negatives

  • Higher interest rates
  • Lower potential borrowing amount
  • Harder qualification