Consolidated Loan: Let the Buyer Beware

Some companies offer Consolidation Loans. In these loans, you combine all existing consumer debts or credit card debts into a single loan and one monthly payment. Some form of collateral often secures these loans: usually the family home.

A co-signer also may secure a Debt Consolidation Loan. The co-signer will be liable for the debt should the primary signer default. Unsecured loans for bill consolidation also exist, but the high interest associated with them may be even greater than your current credit card interest rates.

A debt consolidation loan allows borrowers to make payments to a single creditor rather than to many creditors who compete for loan repayment. Debt simplification is appealing to many people whose personal finances have become complicated and unmanageable, but true debt reduction is usually NOT a benefit of such a consolidation loan.

Consolidation loans, if used to consolidate bills, transform unsecured debt, which is not backed by any collateral, into secured debt, which is. Since most people use the family home as collateral, they place the home at risk should they become unable to meet the conditions of the consolidation loan agreement. If for any reason, you fall behind on monthly payments or become unable to make payments at all, the lender may take the collateral asset.

The interest rates associated with debt consolidation loans also are often in the high range, comparable to high-interest credit card rates. They therefore yield no advantage in reducing monthly payments or total interest payments. The length of time to repayment and total interest usually increase under such a loan arrangement. It can take 10 or 15 years to get out of debt.

See also our related articles.