What is a Debt Consolidation Loan?

Debt consolidation loans are loans aimed in reducing your debts by consolidating it, which is replacing many payments each month into a single payment, making your money management easier. Knowing how to use these loans for debt consolidation is helpful in determining how to properly manage your money and free yourself from debts.

The advantages of debt consolidation loans are that it lowers the risk of you being late in paying your debts because it is already consolidated into one payment while paying off your debt in a shorter time. It will also have a good effect on your credit rating. But, on the other hand, since you consolidated your debts, your monthly bill will be much larger, so you have to be careful.

Financial institutions, especially the banks, offer various types of loans for debt consolidation. This is answer to the seemingly uncontrollable customers’ debts. The loans offered by the banks for debt consolidation includes several financial services such as personal loan, personal lines of credit and home equity loans.

Using home equity for debt consolidation is one way of paying off your debt. Home equity is the part of your home. Equity is built as the value of a home appreciates and as the principle in the mortgage is paid off. It is the difference between the mortgage and the value of a house and can be use for debt consolidation if you are living in your house. This is done through borrowing against your home equity.

Home equity can help you pay your creditors by debt consolidation. Through borrowing against your home equity, you can reduce your interest rates so that a major portion of your payment can go to your principal balances. There are two options in using your home equity for debt consolidation, the home equity line of credit and the home equity loan. These two options are secured by your property, and are called second mortgages. These options must be repaid over a period of 15 years, which is much shorter than the period set up to repay first mortgages.

In home equity line of credit, you will borrow a specified amount of money from a lender, usually the bank or other financial institutions. The lender will give the money up to the credit limit. It works like a credit card due to its revolving balance, in a sense that the given money can be acquired using debit and credit cards, as well as, check books. It is more flexible compared to a home equity loan. The interest rates of the home equity line of credit fluctuate and the payments depend on the rates.

Home equity loan, on the other hand, is type of a home equity wherein you get a second mortgage. It lets you borrow an amount of money with a fixed interest rate. This can be considered as a good option for debt consolidation because it works best when you need to, all at once, borrow an amount of money.

In using home equity for debt consolidation, banks have a formula in determining the available amount of your home equity to be used as a loan. Your debts can then be consolidated into one payment. However, it is important to settle your monthly payment so it will not lead to the lost of your collateral, which is your home. When you use it for debt consolidation, your home will be the guarantee or your collateral. If there comes a time when you cannot be able to repay the debt, the bank can sell your home, in which case you will be forced to vacate it.

Related links:
 Debt to Wealth
 Common Sense Debt Secrets
 Debt Buster Systems