Wednesday, December 5, 2012

What Is the Difference Between Debt Consolidation and Loans?

What Is the Difference Between Debt Consolidation and Loans?

Combining multiple debts into a single monthly payment can make them easier to deal with. Two options for combining debt are debt consolidation programs and consolidation loans, and each has distinct advantages and disadvantages.

Process: Consolidation Programs

    Debts are combined into a single monthly payment to the consolidation company, which distributes payments to your creditors.

Process: Consolidation Loans

    The borrower obtains a secured loan, such as a home equity line of credit, or an unsecured personal loan, and uses it to pay off debts. The borrower then has a single monthly loan payment, rather than paying multiple creditors.

Benefits of Consolidation Programs

    Debt consolidation programs make debt repayment more manageable, and may benefit individuals who are unable to obtain a consolidation loan.

Benefits of Consolidation Loans

    Consolidation loans may offer lower interest rates than consolidation programs, and there are no restrictions on the type or amount of debt that may be consolidated.

Warning---Consolidation Programs

    There are often significant fees associated with consolidation programs and they cannot guarantee you lower interest rates.

Warning---Consolidation Loans

    If you choose to consolidate unsecured debt into a secured loan, you risk losing your collateral if you default.

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