Debt Consolidation Loan
What Is a Debt Consolidation Loan?
When you consolidate your debt, you are putting together all your individual debts into one single debt. A loan that is taken out to cover all the individual debts under a single loan is called a debt consolidation loan.
A debt consolidiation loan typically requires you to take a loan out that is secured against an asset, usually your home. The home serves as collateral. The reason that most lenders require this type of arrangement is because if the borrower cannot meet his or her obligation to repay the loan, then the borrower will be forced to sell the asset to pay back the loan. While this may sound scary, it is nothing more than a way for the lender to minimize their risk, thus allowing them to charge a lower interest rate on the loan. It's really a win-win situation because the borrow is able to take a loan at a lower interest rate than they could if they were to pay all of the interest on the individual loans (typically credit cards at high rates of interest) and the lender is protected by the value of the asset that the loan is secured against.
Since a Home Equity Loan a debt against your own property, which you are in actual possession of, a home equity loan is considered to be a secured debt. What this means is that if the creditor wants the money back that you have borrowed, if you cannot make that payment then the lender may require you to sell the property in order to recover their funds.
