There are a wide variety of debt consolidation loans available. Which option is right for you depends on your specific situations. Debt consolidation loans generally involve taking credit card debts at relatively high interest rates and consolidating them into another loan at a relatively lower interest rate. What most people are after when they consolidate debt is a single repayment that is lower than the combined repayments. This increases the amount of income that can be used to fund the cost of living or be used as extra repayments on the debt.
Criticism of Debt Consolidation Loans
Debt consolidation loans have received a lot of criticism lately. One concern is “churning” – churning involves a situation where a borrower can’t afford the loan and refinances through multiple lenders until the equity in a property is eaten up. The best situation would have been for the individual to sell their house and start afresh. It can also refer to a lender providing someone with credit cards and then consolidating their debt into a personal loan, so that the individual can then afford to spend more on their credit cards, thereby increasing their level of debt and therefore the profit of the lender.
Debt consolidation loans sometimes only treat the symptoms of debt and do not address the root problem.
Debt consolidation loans may lead to the borrower repaying more because short term debts like personal loans may be consolidated into mortgages.
Debt Consolidation Loans: Three Main Types
Unsecured Debt Consolidation Loan/Personal Loan
This is the main thing people think of when the think about Debt Consolidation Loans. There is no asset used as collateral for the loan so it is referred to as an unsecured loan. Debt Consolidation Loans are available from a range of lenders including Banks, Credit Union and Building Societies.
Term
- Maximum 7 years
Maximum Amount
- Maximum $50 000
Credit History
- Must be clean
Interest Rates
- Please see our current average interest rate page.
Secured Debt Consolidation Loans
Some lenders, particularly small lenders, may wish to use a car or other asset as collateral for the loan. This gives the lender added security that the borrower will repay the debt. Contrary to popular belief, reductions in interest rates for this seldom occur. The property just gives the lender added assurance.
Term
- Maximum 7 years
Maximum Amount
- Maximum $50 000
Credit History
- Must be clean
Interest Rates
- Please see our national average interest rate pages
Mortgage Debt Consolidation Loan
If a borrower has a house they should consolidate it into the mortgage with a couple of conditions. There is concern that this will make the house more at risk to lenders. If the borrower doesn’t pay ANY debt the lender can pursue them through the court and have the property sold. This being the case, the borrower might as well get access to the lower interest rate that a debt consolidation mortgage will provide.
Term
- Maximum 30 years
Maximum Amount
- Minimum $30 000
Credit History
- Can obtain a mortgage if there is “bad credit”. A penalty interest rate will generally have to be paid.
Interest Rates
- Please see our national average interest rate pages
