Definition
A consolidation loan is a credit account used to repay other debts so that balances are combined into a single debt with a single monthly payment.
Analysis
Consolidation loans require certain levels of creditworthiness. The eligibility requirements vary by lender, and the terms may vary widely depending on the lender and the applicant’s situation.
Consolidation loans may be unsecured, but they tend to be offered in smaller amounts that rarely exceed $15,000-25,000. Home equity loans may use the available equity in real estate to guarantee a loan that may be used to consolidate other debts. These can be much larger amounts, depending on the available equity and the eligibility of the homeowner.
Consolidation loans are generally limited to consumers with lower debt-to-income ratios. Additionally, lenders typically deny credit requests or impose high interest for consumers with low credit scores.
Consumers that are overextended and risk falling delinquent on bills may want to consider consolidation loans if it will help them stay current on their debt and enable them to repay it on their own. If it is unlikely that a consumer would receive approval for a consolidation loan, then a reputable credit counseling agency should be sought to learn about other consolidation tools.
