Debt consolidation loans are debt loans that are issued specifically to pay off an individuals multiple loans
. After this, the individual is left with a single loan and a single monthly payment to take care of. Debt consolidation loans help in lowering the interest rates paid on loans by paying off the high-interest unsecured loans with a low-interest secured loan. Normally, the high-interest unsecured loans are credit card balances or medical bills. Since they are unsecured, the risk is high for the lending agency or bank, and so the interest rates are high. Taking a debt consolidation loan by placing ones home as collateral would enable one to get a loan at a lower interest rate, since the loan is secured.
Though debt consolidation loans sound like a great idea, the success in staying out of debt lies in not going back to using the credit cards like before. People often use their home equity to take a debt consolidation loan and then forget to make payments. Sometimes, they borrow more than needed for their debt consolidation, and later find themselves in more debt than they started off with. Debt consolidation loans help to reduce and eliminate debt only when the individual is willing to show financial discipline.
Debt consolidation loans can come at variable or fixed interest rates. A variable interest rate loan is good if interest rates are expected to head lower. But it could become bothersome if they start pushing up. Since the individual is not in a position to take any more risks, the best bet would be to lock in an attractive fixed interest rate.