What’s Debt Consolidation?

You have too many credit card bills each month and you’d like to consolidate them, so you can pay one bill each month instead of several.  This is commonly referred to as debt consolidation, which combines all of your unsecured debt into one payment under one loan.

Consolidation loans are either secured or unsecured and are usually at a fixed rate.  An unsecured loan does not use an asset for backing and the interest rate is usually higher than a secured loan option.  A secured loan uses an asset to back up the loan, such as home or auto and the interest rate is usually lower as a result.

In order to get a consolidation loan, you need the following: good credit history, good credit score, steady income, and maybe even stability (live at residence for 2 years).  Many lenders offer these types of loans so shop around for the best deal.  Depending upon your credit situation, you may not be able to get one unless it’s of the secured variety.

Recently, secured loans such as home equity loans have been more difficult to obtain because many homeowners don’t have any equity on their homes, unless you consider negative equity.  In order to be considered for a home equity loan, the financial institution not only reviews the same information as for an unsecured loan but also your asset ownership and home equity.  Financial institutions have tightened the qualifications for this type of loan.

Some people don’t recommend using your home for collateral for anything other than something for your home, such as home improvements.  It’s risky using your home as security.  Why?  Because, if you can’t pay your home equity loan, you can lose your house.

A consolidation loan requires good credit.  Yet the reason you want to consolidate your bills is to reduce the amount you pay on all your credit card bills each month.  If you could pay them off you would.  You have too much debt, which may be considered too risky for a debt consolidation loan.  It is a catch 22. You need to stop using your credit cards and set up a plan to pay them off.  The problem won’t be solved until you stop using your credit cards and begin paying more than the minimum.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.


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