What is a Debt Consolidation Loan?

A debt consolidation loan is a type of financing program that combines multiple loans into a single, new loan. It allows the borrower to restructure his or her debts, and helps improve the credit history of individuals with bad credit ratings.

Types of Consolidation Loan

A debt consolidation loan has two types. These are the unsecured and secured loans.

Unsecured loans - Also known as personal loans, the approval of this plan is entirely based on the borrower's credit rating. No collateral is used to secure the borrowed funds, only a personal guarantee.

Secured loans - This type of lending practice involves a collateral like mortgage, car and other properties.

Benefits of Loan Consolidation

Combining several debts like mortgage, auto, credit cards and other loans into one does not only help solve your debt repayment problems. Other advantages this plan offers are:

  • It eliminates your existing loans with high interest rates.
  • It has lower interest rates and lower monthly payments.
  • It increases credit rating, improves credit history, or helps repair a bad credit record.
  • It pays-off all of your outstanding debts.

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