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Credit Consolidation Loan - Borrower Considerations for Credit Consolidation Loans

collateral signer rates secured

Sometimes it’s financial hardship. A job is lost due to injury, or a car breaks down on vacation. Sometimes it’s mismanagement. An inexperienced credit card user leans too heavily on their credit lines, living above their means for months or even years before realizing how much their credit cards are damaging their finances. Whatever the reason, one thing is for sure: something has to be done about substantial credit card debt.

A credit consolidation loan is one way to deal with this situation. Though not always the best decision, credit consolidation loans can make credit card debt more manageable by combining multiple debts into a single, long-term loan.

The tricky thing about credit consolidation loans is that they are often sought as part of recovery from bad credit. For those with good credit, such a loan is not difficult to secure. Those with bad credit, however, must either accept painfully high interest rates or find a co-signer to vouch for them. When a co-signer vouches for a credit consolidation loan, he promises that he will hold the borrower accountable for the loan or, failing that, pay for the loan himself. In this way, the co-signer answers the bank’s skepticism by taking the added risk onto his shoulders.

If the borrower or co-signer has excellent credit, then an unsecured credit consolidation loan can be sought. An unsecured loan is a loan with no collateral—that is, it is not held against a house, car, or other asset. These loans generally have higher interest rates than secured loans but process more quickly. Unsecured loans can be found on bad credit, but borrowers often have to settle for “payday loans”—small, high-risk, short-term loans gathered from mini-mall moneylenders.

Far more likely is a secured credit consolidation loan. Secured loans are borrowed using collateral. Various assets can be used as collateral, including collections, vehicles, and homes. When the loan is being applied for, the bank representative will want to know what can be offered as collateral as well as its estimated value. The best interest rates will be had from secured credit consolidation loans sought by a borrower (and possibly co-signer) with a solid credit history. The negative side to obtaining a secured credit consolidated loan is that if the borrower forfeits on the loan, the bank can seize the assets that were used for collateral.

There are pros and cons to credit consolidation loans. On the plus side, they lower monthly payments. This can be a huge benefit when payments are being made on multiple credit cards. Consolidation also frees a borrower from the high interest of credit card debts, particularly if a good interest rate is negotiated with the lender. Additionally, easier payments often translate into better credit history.

The hidden price of credit consolidation loans is in their ability to stretch debt. After lumping many small debts together into one large debt with a smaller monthly payment, borrowing periods grow much longer. Put simply, credit consolidation trades many short-term, high-interest loans for a long-term, low-interest loan.

Credit consolidation loans can be paid off faster than the minimum rate. As finances stabilize and savings are accumulated, a borrower can pay off a credit consolidation loan, freeing themselves from long-term interest rates. This is an ideal situation for many borrowers, particularly when lack of good credit or collateral has forced them to settle for higher interest than they may have preferred.

Credit consolidation loans are a useful option for bringing credit card debt under control. By bringing the debts together under a single loan, monthly payments are reduced to more manageable rates, and credit history is insulated from (further) harm. As with all loans, collateral and credit history affect the quality of interest rates available, and a co-signer can assist when these are unavailable.

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