Debt Consolidation Loans

Debt Consolidation is the act of combining several loans or liabilities into one loan. This generally involves taking out a new loan to pay off a number of other debts.  Most people who consolidate their debt usually do this either to attain a lower interest rate, or to have the simplicity of a single loan.  Usually, the new loan has better conditions and more benefits for the borrower than the old loans did.

Types of Debt Consolidation Loans

There are several types of debt consolidation loans that are both secured and unsecured. Some people use services to help them consolidate their loans but these services usually charge fees.  Debt consolidation does not instantly eradicate debt, and every option carries its own price tag.

Unsecured Debt Consolidation vs. Secured Debt Consolidation

Unsecured debt refers to debt that is not attached to an asset such as a house or a car. Lenders offering unsecured debt have to rely on the borrower to repay them. If the borrower does not repay the loan, the lender can charge fees but has no asset to seize in return. Therefore, interest rates on unsecured loans are generally high.

Examples of unsecured debt consolidation loans are personal loans, bank or credit union debt consolidation loans, and credit card loans.

Secured debt is debt that is connected to, or secured by, an asset. If the borrower does not repay the loan, the lender can take that asset as repayment. Therefore, secured debt usually has lower interest rates.  Examples of secured debt consolidation loans are home equity loans and car loans.

Personal Loans to Consolidate Debt

Personal loans can be a good option for consolidating debt if the borrower has good credit. When applying for a loan, ensure that the loan’s interest rate is considerably lower than current rates and that the payback period create undue financial pressure.

Using Home Equity

Homeowners who have built equity in their homes have a few good options for debt consolidation. For one, they can access cash to pay off debts by opening a home equity line of credit. Generally, home equity interest rates are low and borrowers find them easier to repay than credit cards. Alternately, they can refinance their first mortgage and use the cash payout to repay other debts. Both choices replace unsecured debt with secured debt, which ultimately saves a lot of money in interest.


The ability to secure a debt consolidation loan will depend on four factors:

Income Level: The lender must assess the ability to repay the loan. If the borrower is not working, or if they have low income, they probably won’t qualify for a debt consolidation loan.

Loan Needed: Obviously it is easier to qualify for a $10,000 loan than for a $100,000 loan. The more money needed, the higher the borrowers income will need to be.

Collateral: Borrowing $200,000 off a house worth $400,000 is possible, and having collateral of this type will enhance the chances of qualifying for a mortgage debt consolidation loan. If the borrower doesn’t own a home, or if their home has no equity, then it will be nearly impossible to qualify for a secured debt consolidation loan.

The Credit Report: Debt consolidation loans almost always require a good credit score.  People with a good credit rating that are concerned with paying off rising debt should seek out debt consolidation loans before missing payments and adversely affecting credit scores.


There is a general concern that people might use debt consolidation to consolidate unsecured debt into secured debt, which usually is secured against their home. Although the monthly payments can often be lower, the total amount repaid is significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem.


Other options available to overburdened debtors include credit counseling, debt settlement and personal bankruptcy. Some consolidation lenders will renegotiate with creditors on the account holders behalf in order to find the most stable solution.

Loan consolidation onto a credit card:

One option for loan consolidation is to take advantage of credit card balance transfer offers. Credit card companies try to attract new customers by offering zero percent or low percent interest on balance transfers. You can transfer balances from credit cards with high interest rates onto a card with one of these offers.

Consumers should also be aware that frequent balance transfers and revolving credit can reflect poorly on a credit report.