Debt consolidation loans are secured loans. A secured loan is one in which the borrower uses something that he owns as collateral for a loan. The borrower will then use the proceeds from a debt consolidation loan to pay off other loans.
Loans are called by many different names, but basically there are two types of loans. There are secured loans as was discussed above, and then there are unsecured loans. If a borrower defaults on a secured loan, the loaning institution can take possession of the collateral and sell it at auction in order to satisfy the debt.
An unsecured loan does not have any collateral attached to it. If the loan isn't paid, the only recourse that the lender has is to sue the borrower to try to recoup his loss.
Not always, but most often a debt consolidation loan is a second mortgage on a primary residence. The reason is that for most people, the equity that they have established in their home is their largest single asset. Equity is the difference between what is owed on the home and the balance of the mortgage. Fair market value is also considered. If the value of the property has increased since the original mortgage agreement was made, then that appreciation in value is also considered equity.
Being granted a debt consolidation loan is very much like the process that was required to get a first mortgage. Your equity in your home is the collateral that you are using to get a second mortgage. The payment that you will be required to make each month is also a payment on your home just like the first mortgage.
The interest rates for a second mortgage will be much less than the interest rates that you are paying on credit cards, but the length of the loan will likely be greater.
Milos Pesic is a professional Debt Management consultant who runs a highly popular and comprehensive Debt Consolidation web site. For more articles and resources on debt management, debt consolidation programs, free debt counseling and much more visit his site at:
=>http://debt.need-to-know.net/
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