What is a Consolidation Loan?

A consolidation loan is when lots of separate loans are combined into one single loan with one repayment schedule.

People who have a lot of different loans from a number of creditors will often decide to take out a consolidation loan as it is more convenient and it also provides the possibility of lower monthly repayments.

Consolidation loans vary in exactly what they can provide to the debtor, and people take them out for different reasons.

The most common reason behind taking out a consolidation loan is that you have too many loans to pay back, all with different interest rates and the creditors making extra charges. The consolidation loan will get this under control and help you to arrange your finances in a more manageable way.

One thing that you should remember is that a consolidation loan does not provide a way of getting rid of any of your debt. Whereas on other debt schemes, such as the IVA, you have the possibility of writing off some debt in the future, if you have a consolidation loan you will still be expected to pay back the full amount of debt owed, but the way in which you do this will be made easier.

There are different types of consolidation loans. Many people use a basic form of a consolidation loan when they transfer the debt from a number of different credit cards onto one single credit card which has a lower interest rate, thereby making repayments more manageable and affordable.

However, the more common definition of a consolidation loan is when the debtor transfers a number of unsecured loans into a single secured loan. When you have agreed with a creditor to take out a consolidation loan, they will pay back all of your separate creditors the amount you owe, taking on the debt themselves on a secured loan. You then pay back the money to that single creditor at an agreed monthly amount.

As there is less risk involved for the creditor because they have your home as collateral, they will therefore be more likely to provide a lower rate of interest on the consolidation loan than on all the separate loans. To get the lowest possible interest rates it is a good idea to take out a second mortgage with the creditor who provided you with your original mortgage.

A consolidation loan is also a good way to arrange to pay back smaller amounts of money each month, meaning you will have access to a greater amount of income to spend on a monthly basis rather than paying it all back in loans.

However, the danger lies in the fact that once you take out a consolidation loan you will be under a secured loan agreement, and this means you effectively have a lot more to lose. The creditor now has your home as collateral, and this means if you fail to make any of the monthly payments then you run the risk of losing your house.