If you find yourself in a difficult financial situation with multiple debts you can’t afford to pay, it is time you consider a debt consolidation loan. A debt consolidation loan is a loan you can borrow from a bank or another financial institution to pay out your other debts. In this case you get free from multiple debts to numerous lenders, instead you have a single loan. It’s a viable debt relief solution for people in bad debt situations.

Let us see what different types of debt consolidation loans are offered by different financial institutions. A debt consolidation loan can either be secured or unsecured. A secured debt consolidation loan requires collateral in order to obtain the necessary amount. In most cases people put their homes as collateral to take out the debt consolidation loan. In case of an unsecured debt consolidation loan, there is no requirement of collateral, this type of loan is based on the character and capacity of the debtor to pay out the loan. Now let us dwell on the reasons why people opt for the debt consolidation loan:

• you have multiple debts to various lenders and you have difficulty sending checks to various creditors on different dates;
• you face the problem of prioritizing your payments to multiple creditors, because you can’t afford to pay them all;
• you can’t stay current on the payments;
• you have multiple debts with various interest rates, and you would like to have a single interest rate and a single loan;
• you would like to lower your monthly payments;
• you are a home owner and would like to leverage your home’s value in order to pay your credit card debts, store card debts and etc.

In order to qualify for a debt consolidation loan you need to present the following documents to the financial institution:

• a copy of your monthly family budget. The financial institution has to determine whether you meet your loan repayment plan;
• a document certifying your steady income that allows you to repay the loan;
• in some cases a co-signor or collateral (a house or a car).

Before you go for a debt consolidation loan you should make some important verification. First of all, avoid companies that charge big fees before they offer you any kind of services. Mind that there are plenty of fraudulent companies willing to take advantage of your situation. Evaluate the interest rate on the debt consolidation loan of your choice. Mind that the secured loan has smaller interest rate that the unsecured debt consolidation loan. Also make sure that you’ll be paying a less monthly payment than you were paying on your multiple debts.

Before you opt for the debt consolidation loan you must ask your financial expert about the effect on your credit score. Avoid lenders who do not give consultations on this issue. Once you decide that a debt consolidation loan is the right solution for you, you should assess your financial situation and the total amount of debt you owe. You need to work out a monthly budget, where you can see the total amount of income you have, the spending and emergency cases. You must have a clear idea of how much you would like to borrow as a debt consolidation loan and will you be able to pay the given amount, because if you fail to do so, it will affect your credit score adversely.

So, a debt consolidation loan can actually get you out of debt, but only if you stay self-disciplined, stick to the budget and stop overspending. In case you continue with the lifestyle that brought you in debt up to your eyeballs, then in two or three years you will find yourself in a situation far worse.

Summarizing the above-said, let us see the advantages of a debt consolidation loan:

• all your multiple debts with various high interest rates are combined into a single loan with a lower interest rate;
• you finally pay out your current debts;
• a single payment with a single interest rate helps you manage your budget better, helps you cut off the late or missed payments;
• you only deal with one lender, so there are no more harassing creditors on the phone.

However, there are some disadvantages, too: 

• a lower interest rate implies smaller amount of monthly payments, but a longer repayment period;
• if you wish a small interest rate you have to pledge your house or a car, but remember that if you fail to pay out you may lose your assets;
• a big loan on your record can sometimes affect adversely your credit score;
• a debt consolidation loan offers debt relief for your existing debts, but it doesn’t solve the problem of poor spending habits and inability to stick to the budget and live a life you can afford.