A consolidation loan can be very useful in a number of circumstances, including the consolidation of multiple loans, the elimination of debts, and even the refinancing of older loans into a single loan with a lower interest rate. Unfortunately, choosing the right consolidation loan for your specific needs isn't always easy.
Different types of consolidation loans exist and are used by a number of people with different credit ratings and financial backgrounds. These loans are exceedingly useful in credit repair, and can even help individuals who thought that there was no other way out to avoid bankruptcy. If you're interested in consolidating your outstanding debts, then here are some tips that will hopefully help you to decide on the loan that will best help you to consolidate.
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Secured, or Unsecured?
A loan is secured by using valuable property called collateral to guarantee repayment of the loan. If the loan is secured, then the value of the collateral is used as a basis for how much you can borrow and what interest rate you'll have to pay. Automobiles and real estate are most commonly used as collateral for a consolidation loan, though there are other types of collateral that may be used as well.
Unsecured loans don't require any sort of collateral as a guarantee, and are less commonly used for debt consolidation than secured loans. They generally have higher interest rates, but don't run the risk of property loss because nothing is used as collateral. They are most often used to pay off debt quickly, because doing so can help save interest charges from long-term accounts.
Interest Rates
The way that banks and other lenders earn profit from a consolidation loan is by charging interest, or an additional amount that's added onto the borrowed amount at regular intervals. Interest is charged as a percentage of the remaining amount of the loan added to the loan every month, and may vary based upon rates that are set by the government, bank or finance company promotions, the value of the collateral offered, and even the credit history of the borrower. The lower the interest rate is, then the less you'll end up paying in the long run.
Partial Consolidation
If you aren't able to find a consolidation loan to cover all of your debts, then another option may be borrowing only enough to consolidate your largest debts. This allows you to pay off the worst of your debts and replace them with a single payment. You may also better be able to suppress the temptation to use newly freed credit, since you'll still have a portion of your debt remaining over your head.
Finding the Right Loan
Be sure to research all of your options for a consolidation loan thoroughly before you try and decide which loan is right for you. Request loan quotes from a variety of lenders, including finance companies and online lenders. Bad credit may mean that you'll have to pay a higher interest rate, but by taking the time to compare loan quotes you should be able to find the best interest rate that's available to you.
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