InvestingBytes.com

A debt consolidation loan is just a type of personal loan that a person may take in order to pay off or simplify existing debt. There are two types of debt consolidation loans namely – secured and unsecured. The difference between the two is that secured debt loans use collateral whereas unsecured debt loans do not use collateral. Between the two, unsecured debt loans are more common. Financial institutions like banks and credit unions provide secured debt consolidation loans. They use collateral such as home equity and have better interest rates when compared to unsecured debt loans.

Home equity debt consolidation loans are a type of secured debt consolidation loans and they offer a fixed interest rate. The interest that you pay on your home equity loan is usually tax deductible. But it is a risky endeavor as your home may be foreclosed on if you cannot pay the home equity loan. Home equity loan periods can last up to ten years and in case the price of your home drops during that period, you may end up paying more than your home is actually worth.

The advantages of taking a home equity loan to consolidate debts are that you can save money on interest and monthly payments. It can help you avoid missing a monthly payment and if you have a plan that helps you lower your monthly payment rates, it will be easier for you to handle. Another big advantage of a debt consolidation loan is that they enable you to increase your credit score.

But like everything else, there are some disadvantages when you opt for a home equity loan to consolidate debts. Debt consolidation loans are not a good idea for every customer as it may also end up increasing your interest rate rather than lowering it. There is always the factor of putting your asset, in this case, your home at risk. Then there is always the risk that you might get into new debts just because you have managed to clear out your old one.