Consolidation loans are types of loans that are issued for the purpose of paying off a number of smaller loans. A consolidation effectively replaces debt with debt, but this kind of loan replaces several loans with one, allowing consumers to make only one monthly payment.http://www.investorwords.com/1048/consolidation_loan.html

Loan consolidation can be done with the use of a home equity loan or home equity line of credit, using home equity to absorb debts on personal property. Credit cards can also be used to consolidate debt from other cards, and some credit card companies offer introductory rates for this purpose. Banks may also issue personal loans to account holders with good credit for the purpose of consolidating debt.http://www.debtconsolidationloan.com/p_debt_consolidation.aspx Consolidation loans are also offered to college graduates to simplify the repayment of various student loans.http://loanconsolidation.ed.gov/help/faq.html

As with most financial decisions, there are advantages and disadvantages to consolidating debts into one loan.

Pros:

• Lower interest rates: While this does not always occur, consumers are often given a lower interest rate when they consolidate their debt. This can translate into lower monthly payments and an immediate budget savings for more loan recipients.
• One payment/One creditor: Having to only make one payment instead of many can be helpful for people trying to get on top of their debt. Having only one creditor can simplify the process of contacting the creditor, especially if a consumer falls behind on payments.
• Tax benefits: For consumers who use their home equity to consolidate debt, interest on that debt becomes tax deductible.http://www.creditsourceonline.com/debt-consolidation.html

Cons:

• Potential for more debt: Having a lower payment is only helpful to consumers who have developed the habit of living within their means. http://www.daveramsey.com/article/the-truth-about-debt-consolidation/ For consumers who have not learned how to rein in poor spending habits, the lower payment may make it easier to acquire more debt.http://www.creditsourceonline.com/debt-consolidation.html
• Longer loan period: For most consolidation loans, and especially in the case of those tied to mortgages, lower payments are possible because the time it takes to pay off the balance of the loan has been extended. This adds up to more payments over the long term and more money going to the creditor.http://www.daveramsey.com/article/the-truth-about-debt-consolidation/
• Higher risks for consumers: In the case of home equity loans, because the loan is secured by the borrower’s home, a default in payments can result in the loss of that home.http://www.creditsourceonline.com/debt-consolidation.html

The content in this page is not a substitute for professional financial advice. Please contact a finance professional before using the information presented here.