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Debt Consolidation Loans

There are a wide variety of debt consolidation loans available. Determining which option is right for you depends on your specific situation. 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 total 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 all 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 thereby increasing profits to the lender.

Debt consolidation loans sometimes only treat the symptoms of debt and do not address the root problems. These loans may even lead to the borrower into 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 concept that 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 unions and building societies.

Term

  • Maximum seven 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 offered collateral seldom occur. The property just gives the lender added assurance.

Term

  • Maximum seven 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’ practices. If the borrower doesn’t pay ANY debt, then the lender can pursue them through the court and have the borrower’s property sold. This being the case, the borrower might as well get access to the lower interest rate that a mortgage debt consolidation may provide.

Term

  • Maximum 30 years

Maximum Amount

  • Minimum $30 000

Credit History

  • Can obtain a mortgage even 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

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