While a debt consolidation loan may be the right decision for some consumers, it may lead other consumers to financial ruins. Everything mentioned above regarding debt consolidation loans apply here as well. In fact, consolidation loans are often home equity loans. Consolidation loans, however, need not be a home equity loan. A home equity loan and a second mortgage both use the equity in your home as collateral.
Interest is charged on the entire amount borrowed and monthly payments begin immediately.
Both types of loans typically require processing fees, an appraisal fee and possibly other costs. Consumers, however, must factor in all of the costs of getting the loan. After doing all of the calculations, in some cases, the actual cost may be much higher than anticipated. On the other hand, depending on many factors, including your credit worthiness and equity, the cost of processing the loan and resulting monthly payments might not provide you with any relief at all. Traditionally, lenders use a formula for determining eligibility and how much they will lend.