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Getting it Right: Understanding the Types of Debt consolidation loans

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Debt consolidation loans are very serious commitments. When you get debt consolidation loans, it means that you have already incurred a substantial amount of debt and you’re using the loan to help settle those other debts. Hence, debt consolidation loans must be taken seriously. If you fail to meet the requirements of your loan, you may end up far worse than when you started. So before you choose the type of loan, do your research.

Secured or Unsecured?

The first step in choosing debt consolidation loans is deciding between a secured or unsecured loan. A secured loan is a loan that uses an asset as the collateral. The secured loans work in such a way that when you fail to meet the required payments, the loaning company will be allowed to take the collateral from you. People usually refer to this process as repossession. This loan may be more dangerous since it will require you to put a very valuable asset on the line. This means that you have to risk losing your car or your home. However, since the loan company has the collateral and since they know that you will strive harder to make sure your asset does not get repossessed, they will be willing to offer lower interest rates.

On the other hand, an unsecured loan means the loan is backed by nothing but the credit itself. There are no collaterals. This type of loan does not carry the risk of you losing any of your possessions. However, since the lender does not have the security of collateral, you may not get low interest rates.

Now that you have learned a bit about secured and unsecured loans, let’s look into more specific options for consolidating debts:

Home Equity Loan – Debt consolidation loans may come as home equity loans. This means that you will borrow against your house. You’re telling your loan company that you’re committed to paying and as guarantee, you’re putting your house up as collateral. Until you’ve finished the loan, the loan company will hold the deed of your house and they will have the right to claim it, if you fail.

Zero-percent Credit Card – Debt consolidation loans were meant to make it easier for you to manage debt. When you transfer your credit card debts to a single, zero-credit card, you will be able to reduce the interest significantly. However, remember that zero-percent credit cards are not a free pass. The zero-percent interest lasts only for a while, usually for six months. Also, the moment you miss a single payment, the interest rates will balloon. Hence, zero-credit cards must be taken with a lot of patience, diligence and responsibility.

Debt consolidation loans – There are finance companies that offer actual debt consolidations loans. However, before you commit to a debt consolidation loan, make sure you know how much debt you are paying now. After that, look at the options of debt consolidation loans and see which ones can be more helpful to your situation.


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