Personal Loans for Debt Consolidation

Personal loans are often referred to as consumer loans. These loans may be procured for the sake of furthering one's education, for undertaking household repairs, or for medical reasons. In fact, it's possible to obtain a personal loan with the intention of splurging on a vacation, although a very small percentage of the population actually obtains a personal loan for financing a vacation, since it can be easily charged to the credit card. Nevertheless, a personal loan may be obtained for a multitude of reasons. Personal loans for debt consolidation may be availed by people who are knee deep in credit card debt and looking for ways to repay the same.

Types of Personal Loans

Secured Personal Loans: A secured loan is collateralized by an asset. The asset may be a car, a home, or any property that can be used as a collateral for procuring the loan. A personal loan may also be secured by a co-signer who agrees to repay the loan in case the borrower fails to make good the obligation to discharge the loan.

Unsecured Personal Loans: Unsecured loans, or signature loans, are advanced to the borrower on the basis of the borrower's credit history and income. The loan, as the name suggests, does not require any collateral. Hence, it is ideal for people who want to procure a personal loan but are unable to provide an asset or come up with a co-signatory.

Personal Loans for Debt Consolidation

Debt consolidation is the process of discharging debt obligations, both secured and unsecured, using a loan that has lower monthly payments and a longer repayment period as compared to the already existing debts. Consolidation can be undertaken by availing either a secured personal loan or an unsecured personal loan. As a rule, it's always better to discharge unsecured debts and secured debts by availing unsecured personal loans and secured personal loans respectively. The following factors will govern your choice of personal loans for debt consolidation:

Loan Amount: The amount that people would like to borrow determines whether the personal loan should be secured or unsecured. Typically, amounts between $300 and $7,500 can be procured by applying for an unsecured personal loan. People who have significant debts would be better off opting for a secured personal loan since loan amounts over $5,000 may require a collateral.

Rate of Interest: A person who is interested in a personal loan that carries a low rate of interest should opt for a secured personal loan, assuming that he/she has an asset that can be used to collateralize the loan. It would behoove the readers to note that the term, 'low' is relative to the rate of interest on the debts that are to be consolidated. The rate of interest on a secured loan is lower than that on an unsecured loan. The lender's risk is reduced since a lien against property can be used to settle unresolved debts. Hence interest, which is a reward for the risk that is undertaken, is proportionately reduced.

Term of the Loan: The loan that is availed for debt consolidation should have a longer repayment period as compared to the loans that are to be consolidated. Generally, secured personal loans have to be repaid within 10 years from the date of procurement, while unsecured personal loans have to be repaid within 5 years.

Credit History: The ability to procure an unsecured personal loan is contingent on the borrower having good credit scores and credit history in addition to the ability to repay the borrowed sum. This is because unlike secured personal loans these loans are not collateralized.

It is evident that the choice of personal loans for debt consolidation depend on the rate of interest on the loan, the credit score of the borrower, the repayment period, the loan amount, and the type of debts to be consolidated. People who have poor credit may benefit from the article, 'bad credit personal signature loans'. In addition to personal loans, personal lines of credit may also be availed by borrowers who desire to pay off their debt obligations with the aid of debt consolidation loans.