Consolidation loans are personal loans that are marketed to borrowers as a way of cutting down the stress and interest charges that comes from having multiple loans.

Because consolidation loans are comprised of one larger amount they tend to have a lower interest rate. The interest rate can be further lowered by getting the loan secured, usually on a house and then extending the period of the loan. By both extending the period of the loan and lowering the interest rate, the repayments for the consolidation loan are lower than those for other loans.

 As the loan only needs to be paid off in one installment per month, it can further reduce the stress on the borrower by having a payment that can be coordinated with the salary payment date. In some cases the loan can be deducted directly from the payroll.

Although the repayments and the interest rate does go down, the total interest paid may actually increase as the term of the payment tends to go up.

There may also be an option to take an extra loan out on top of the loans that’s already being paid.

Consolidation loans are often suggested as a solution to pay off all debts. This is not always a good idea depending on how far along the borrower has got in paying off their loans.

Consolidation loans tend to increase the capacity to borrow by increasing the term of the loan, and in many cases by securing the loan to a property effectively converting the loan into a secure loan. The credit cards are still available to spend and the borrower may have taken out an extra loan. This means that the borrower could find themselves in more debt than they were before.

The loans that are consolidated tend to be unsecured loans. This means that the lenders have no rights over any specific assets. However, consolidation loans are often secured and so a person taking a consolidation loan could be taking out a loan where they could lose their house, something they may not have done before.

It is always best to make sure that the borrower is at a stage where they are paying off debts and they are in the habit of spending carefully. In this case a consolidation loan may be a good idea, as long as no extra loans are taken out and that the pay down term is roughly the same as the rate at which the borrower is currently paying their loans.