What Is Loan Consolidation?
Loan consolidation is defined simply as taking loans to service or pay back other loans. It is a term in the finance world that describes how companies try to service consumer debts and various liabilities with a bigger loan which is then serviced at a lower rate or on a reduced installment or even both. It is all about taking a single big loan to settle many debts, and the big loan is then paid at a friendly rate and reduced installment.
Although it has a lot of relevance to companies, it is very much applicable individually, like in student loan repayment, debt on credit cards, and other forms of liabilities on a personal level.
There are two basic types of loan consolidation, broadly speaking
- Secured loan consolidation
- Unsecured loan consolidation
Secured loan consolidation:
These are loans mainly backed up by fixed assets, which may include houses, lands, or even cars. These kinds of loans are much easier to get from creditors as there is collateral on the ground.
Unsecured loan consolidation:
These are loans that do not require any collateral. These kinds of loans are complicated to obtain, and they do attract higher interest rates than secured loans.
It is essential to understand how it works. A person who is drowned in many debts like student loan credit card debts can apply for a massive loan from a big credit union. The loan will be used to settle debts at a friendly rate and installment, and several creditors provide these services.
The rationale behind this is that creditors see loan consolidation as a means where debtors can quickly pay off their debts. That is, it offers debtors an easy way to pay off their debts at greater ease. Banks and many companies also provide this kind of service.
Loan Consolidation Example
Katie has a high amount of debt due to several different loans she has taken in the past. This consists of her student loan and three separate credit card debts. She decides to take out a loan to repay these debts. Katie then must make monthly payments on the new loan until it is repaid. This is easier for her as the overall interest rate is lower and only one monthly payment must be paid.« Back to Glossary Index