Debt Consolidation: Answers to Your Questions

1. What is a debt consolidation loan?
   A debt consolidation loan is an individual loan that is used to pay off other existing debts, thereby consolidating those debts into one loan.
2. What types of debt consolidation loan are available?
   There are two types of debt consolidation loans: unsecured personal loans, which do not require collateral, and secured loans, such as a home equity loan, which do require collateral.
3. How is the amount of a home equity loan determined?
   The amount of a home equity loan is based on the amount of equity the consumer owns in his or her home. The lender might start with a certain percentage of a home's appraised value - typically 75 percent to 80 percent. Then, the amount the consumer still owes on the home's mortgage is subtracted from the adjusted value of the home.
4. What are the benefits of a debt consolidation loan?
   
   • A debt consolidation loan can simplify your monthly finances by replacing multiple payments with multiple due dates with just one monthly payment on the loan.
   • A debt consolidation loan can provide lower monthly payments through lower interest rates compared to most credit cards and other types of personal loans and an extended repayment period.
   • A debt consolidation loan in the form of a home equity loan can provide a tax break for individuals because the interest paid on a home equity loan is tax deductible in most cases.
5. What are the potential risks associated with a debt consolidation loan?
   
   • If the borrower is not careful, a debt consolidation loan could end up costing the borrower more money in interest payments over the long term. While the interest rates on debt consolidation loans are typically lower than the rates associated with other forms of debt, the extended repayment period could result in more accrued interest over the loan's repayment period.
   • With a home equity loan, the borrower's home is used as collateral to back the loan. If the borrower defaults on the loan, he or she is at risk of losing the home.
6. What is a debt consolidation program?
   A debt consolidation program is a financial service that works directly with your creditors on your behalf to assist you in paying down your debts.
7. Who can benefit from a debt consolidation program?
   While almost anyone with multiple debts could benefit from a debt consolidation program, those who potentially could benefit the most are individuals with credit ratings too low to acquire a debt consolidation loan.
8. Are there costs associated with a debt consolidation program?
   With most debt consolidation programs, the consumer must pay a one-time representation fee, which covers the initial contacts with the creditors, and then a monthly representation fee.
9. What are the benefits of a debt consolidation program?
   
   • A debt consolidation program can simplify your monthly finances by coordinating your multiple debt payments. You pay the program directly one payment each month, which is then used by the program administrators to pay your creditors.
   • A debt consolidation program can lower your monthly payments and save you money on interest payments by negotiating lower interest rates on your current debts.
   • A debt consolidation program can help you to become debt-free in a shorter amount of time compared to continuously paying minimum payments on multiple debts.
10. What are the potential risks of a debt consolidation program?
    
    • A debt consolidation program could end up costing the consumer more money in the long-run as a result of the multiple representation fees.
    • There are several unscrupulous debt consolidation programs out there targeting struggling individuals. As such, one should fully research any debt consolidation program before signing on for its services.