Many times, people find themselves buried under a pile of loans. Managing a number of loans often proves to be cumbersome. A debtor who is struggling with a number of loans, both secured and unsecured, may be able to reduce the debt burden by opting for debt consolidation.
Understanding Debt Consolidation
A debt consolidation loan is made available to the debtor, at a lower rate of interest, in order to help the debt-laden consumer replace the multitude of loans with a single loan that requires lower monthly payments. The luxury of being able to replace multiple loans with a single loan comes at the expense of a longer repayment period. This is because the monthly payments are reduced and spread over a period of time. People may try and consolidate their loans by obtaining an unsecured or a secured loan.
For instance, a home equity loan (HEL) or a home equity line of credit (HELOC) may be used to consolidate debts. Here, the built up home equity is used to obtain a loan or a line of credit with the house functioning as the collateral. Although unsecured personal loans may be hard to come by, an unsecured loan may be better for debt consolidation since the debtor does not risk losing the collateralized asset, which in this case is the home.
Both, refinancing and debt consolidation help the debtor discharge debt obligations under relatively favorable conditions. However, there is a subtle difference between the two. Refinancing is the process of paying off a secured loan by opting for another loan, usually of the same size using the same property as a collateral. Debt consolidation, on the other hand, is the process by which secured and unsecured loans are repaid using a loan that may not require a collateral. Generally, refinancing is better for discharging a secured loan while consolidation is useful for repaying a number of unsecured loans.
Debt Consolidation with Government Help
Debt consolidation with government help may be feasible in case a person is straddled with student loans. Student loans that are obtained directly from the Federal government are known as direct loans. Student loans obtained from banks, credit unions, and other lenders participating in the Federal Family Education Loan (FFEL) program, are known as FFEL loans. Both Direct and FFEL Parent PLUS loans are offered to parents who are willing to fund their child's education. Government debt consolidation loans are available for consolidating both Stafford and PLUS Loans.
Consolidating Stafford Loans
Stafford loans are administered by the U.S. Department of Education, can be subsidized or unsubsidized, and are administered as Federal Family Education Loans (FFELs) or Direct Loans. Stafford (FFELs and Direct) Loans can be consolidated by borrowers after they graduate or leave school. Students who attend school less than fifty percent of the time, can also procure direct loans. The federal government administers both Direct Consolidation Loans and FFEL Consolidation Loans that can help borrowers consolidate their student loans.
Borrowers who do not have Direct Loans, can avail a Direct Consolidation Loan provided they include at least one FFEL Loan in the list of loans to be consolidated. This facility of consolidating student loans is also available to a borrower who is delinquent or has defaulted on the student loans provided certain conditions are satisfied.
Consolidating PLUS Loans
All PLUS loans are eligible for consolidation once they have been fully disbursed. FFEL PLUS Consolidation Loans can be availed by parents and guardians who are interested in financing their children' education. To obtain a FFEL PLUS Consolidation Loan the parents/guardians do not have to undergo credit checks. Parents/guardians can also apply for Direct PLUS Consolidation Loans provided they have a good credit history.
Government programs, like the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP), help homeowners make mortgage payments by modifying the payments or by refinancing mortgage payments. The government, however, does not provide debt consolidation loans to homeowners to help them repay their mortgage obligations.