What Is a Consolidation Loan?

Many financial institutions advertise consolidation loans as a way to improve the borrower's financial situation. They may promise a lower payment, lower rates and other favorable terms. However, not all borrowers qualify. Banks offer several types of consolidation loans to fit the customer's needs. For many consumers, consolidating debt is only one part of the problem. They also need to prevent accruing debt by learning to spend money wisely.

Types

A consolidation loan involves combining several loans into one. Some companies buy debt at a discount from the lender and pass the savings on to the borrower. Banks offer personal loans, car loans and home equity loans to qualified consumers to consolidate debt. Consumers need to be careful about these offers as they often are scams.

Unsecured Loans

High-balance, high-interest credit cards charge high monthly payments. Banks may offer consolidating them into an unsecured personal loan with a lower interest rate, shorter repayment period and lower monthly payment to qualified consumers. Some companies buy credit card debt at a discount from the lender and pass on some savings to the borrower. The Federal Trade Commission warns that some offers may be scams and advises consumers to research companies before signing an agreement.

Home Equity Loans

Consumers who own their home and have equity may be able to borrow against it and repay the debt. Home equity loans are likely to have the lowest interest rate but may not be the best choice for borrowers with high debt. If a borrower is not able to make payments, he will lose his home. Some financial institutions may not be willing to loan more than 80 percent of the market value of the home. A borrower must have a significant amount of equity available to finance a home equity loan.

Car Loans

Consumers may not be aware that their vehicles can help them to pay off their high-interest debt. If a borrower owns a car free and clear, a financial institution can set up a car loan against it. Car loans usually have lower interest rates than credit cards. This option is for consumers who don't have a high amount of debt and who are looking for a lower interest rate.