Consolidation Loans vs Recourse Loans

Consolidation loans and recourse loans both provide borrowers with an opportunity to scale down their monthly debt payments and possibly avoid the need to file bankruptcy or face a default. These two types of loans, however, do have some distinct differences.

Understanding Straight Consolidation Loans

Consolidation loans are basically umbrella loans that take in all or most of a debtor’s debts into a single lending vehicle. The resulting loan is generally quite large, but can offer lower monthly payments and a better interest rate than the individual accounts offered when separated out.

When a consolidation loan is taken out other creditors are paid off. This leaves the single loan as hypothetically the debtor’s only loan. This can be beneficial financially and it can also help protect a debtor’s credit standing.

While not all consolidation loans are alike, many do involve the refinancing of a home to use as the collateral on the loan. This means if the borrower defaults, the creditor can foreclose on the property to recover the loss since it will become the new mortgage holder.

A Look at Recourse Loans

Recourse loans are often used in place of consolidation loans to ease a debtor’s monthly burdens and make repayment more feasible. This type of loan is generally secured with real property, be it a home, car or other assets. In addition, the lender retains the right take other avenues to regain its loss if the borrower defaults. The holders of recourse loans, for example, can liquidate the property attached to the loan in the case of a default. It can also liquidate other property owned by the debtor, as well.

The Benefits of Either Option

Recourse and consolidation loans can both have their benefits for debtors who are in financial straits. By taking in all the debt owed and potentially lowering the total monthly payout, these loan types make it easier for debtors to bail themselves out without filing for bankruptcy. If these loans are established properly and the payments are affordable, they can provide a way out of financial difficulties. Debtors, too, must make responsible actions with their money after one of these loans goes into effect. Defaulting on either type of loan can have dire consequences.

When to Seek Legal Help

If a financial situation is difficult enough that recourse or consolidation loans are being considered, a debtor should seek legal help. A reputable lawyer can help a debtor explore all their options, including bankruptcy. In some cases, it might be more advisable to pursue bankruptcy than try to work through the terms of a new loan. Debtors will be in a better position to make the right decision for their unique circumstances after exploring all the options with a reputable attorney.

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