Debt Consolidation Loan Consequences

Debt consolidation loan consequences differ depending on what type of debt consolidation you are considering. Nevertheless, debt consolidation loan consequences are easy to understand.

For the non-mathematically minded, the bottom line is that you will be reducing the amount of your monthly payment, and will therefore be taking much longer to pay the loan back. The repayment is made up of an interest portion and a capital portion. The capital portion is the actual amount that you owe. The interest is the cost you pay to borrow the capital. What debt consolidation does, is it gives you a lower interest rate but also lets you lower the capital repayment.

This means that your monthly repayment is reduced, but that you end up taking much much longer to pay the debt back.

You will essentially still be in debt, just with easier payment terms. By no means does this get rid of your debt.

There are two main different types of debt consolidation loans (secured loans and unsecured loans), each with different benefits and disadvantages. Here are the factors you must consider when deciding whether to go for a secured or unsecured debt consolidation loan.

Unsecured Debt Consolidation Loans

The up side is that there is no collateral involved so you can't lose your home if you default. If you do default it will be bad for your credit rating nevertheless, but this is still better than not making the mortgage repayment. This means significantly less responsibility.

But because of this the bank or lender will usually charge you a higher interest rate than with a secured loan. Because the interest rate is higher than for a secured debt consolidation loan, you will be saving less on repayments and you will need to calculate whether this will in fact save you anything at all after fees and charges.

Another disadvantage is that you will have a separate payment each month from your mortgage. For someone who is laboring under a very stressful situation, just the peace of mind of having only one payment may be a consideration.

Secured Debt Consolidation Loans

You will most likely be offering your home as collateral for a secured consolidated loan. This can only happen if there is enough equity in your home. If you have negative equity in your mortgage (ie you already owe the bank more than the home is worth on your mortgage), then a secured loan probably won't be available to you.

The benefit of a secured loan is that you will get a lower interest rate and a longer repayment term which will save you the most money in the short term.

The disadvantage is that this payment will be tacked onto your existing home repayment and if you default for any reason, it will bring you one step closer to that foreclosure notice you are hoping to avoid. So it is higher risk in the sense that if you get into further difficulties you could end up losing your home.

Because the loan terms can be very long, check that you can pay off part or all of the loan with no penalty sooner than the term of the loan. Then if and when your financial situation changes for the better, you can start to settle the debt quicker with no penalty.

Only you can decide if you are able to handle the responsibility and risk. So you can see that it is important to carefully consider debt consolidation loan consequences before you make decisions about how to proceed.

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