When you consolidate debt with a debt consolidation loan you basically replace many smaller loans and outstanding debt with one larger, more manageable loan. Instead of trying to manage all those different loans and risk, you can have a single loan with lower monthly payments.
You can either use a secured or unsecured loan to consolidate your debt.
The secured debt consolidation loan
With a secured debt consolidation loan you basically give your property as security against the loan, hence the term secured loan. Should you not be able to pay back the loan, then you run the risk of losing your home.
However the interest on a secure debt consolidation loan will be much lower due to the security the bank has in the form of your home. You will also qualify for a much higher amount than would be the case with an unsecured loan.
Should you consolidate your debt into your home loan it is always advisable to repay the debt over the short term, rather than capitalizing it over a 20 year term for example.
The unsecured debt consolidation loan
With an unsecured debt consolidation loan you will be granted finance without having to put up collateral (security). This will protect your property from being repossessed should you not be able to repay the loan.
However, because of the higher risks associated with such a loan you will have to compensate the bank for such a risk by paying a relatively higher interest rate than the rate charged on a secured option.
Generally speaking, you will not qualify for a large sum of money for the purposes of debt consolidation without any form of security.
The kind of debt consolidation loan that best suits your needs depends on your individual circumstances and remains your choice.
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