A debt consolidation loan is a secured loan where the proceeds are used to pay off other loans, lines of credit, credit card and other unsecured debts.

These types of loans generally require all of your unsecured debts being consolidated and paid in full as a condition of the loan, and most lenders will stipulate they must send full payments to your creditors before you can receive any remaining funds.

One advantage of a debt consolidation loan is that monthly credit card and other unsecured debt payments are reduced by obtaining a long term collateralized loan or second mortgage with a lower interest rate, using the proceeds to pay off your other debts. Another advantage is that interest payments can be tax deductible, unlike credit card interest payments which are not deductible. 

There are also disadvantages. Personal secured or home equity loans used for credit card debt and other unsecured debt consolidation can have serious long term consequences if you fail to make the payments. Fixed monthly payments are made for many years and your credit rating can decline due to the loan term commitment and your debt to income ratio.

If a catastrophe or another event affecting your cash flow should arise, you can lose your home and possibly other assets if you default on the monthly payments.

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