Consolidation loans can be a good way to reduce monthly paperwork and the money spent on debt. In a consolidation loan, a consumer’s pre-existing loans are paid off with a new loan. This new loan usually has a lower interest rate and longer payment term than the loans that the consumer had before consolidating. This means that the consumer will have lower payments to meet every month, and in some cases will pay less over the entire life of the loan. In general, there are two types of consolidation loans, secured and unsecured. For a consumer in the market to consolidate his or her debt, it is important for him or her to understand both of these types of loans.
In order to save money with a consolidation loan, the new loan must have a lower interest rate or a longer payment period than the old loan. Most importantly, the new loan that is taken out must have a high enough amount of credit extended to cover the total amount of his or her debts. This new loan should be used to pay off all of the old debts. This will leave the consumer with one loan that he or she will have to make payments on.
Unsecured consolidation loans are a type of debt that is not backed by any assets or collateral. In general, the most common examples of this type of debt are credit cards. When using an unsecured loan to consolidate, a person has to apply and be approved for a new loan. Unsecured loans are a good way to consolidate small amounts of debts. It is usually recommended to use this type of loan to pay off both secured and unsecured high interest debts.
Secured loans, on the other hand, are secured with assets which can be repossessed or taken back by the lender in the event that the person who has taken out the loan is unwilling or unable to make their payments. The most common examples of these types of loans are auto loans and home mortgages. Because every secured loan is backed by an asset, these loans typically come with lower interest rates than unsecured loans. Before opting for this type of loan, however, a consumer should carefully consider if he or she is willing to lose the assets that he or she has put up as collateral. Other than this difference, however, secured consolidation loans are very similar to unsecured consolidation loans.