What Is Debt Consolidation?
Debt consolidation is a method of taking out one loan to pay off many others. In the process of debt consolidation, all existing loans are combined and pay off with a debt consolidation loan which often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing one loan instead of multiple debts/loans.
Debt consolidation can be simply be combining a number of unsecured loans into one unsecured loan, but most of time, it involve getting a secured loan against an asset such as home, boat or land that serves as collateral. This secured debt consolidation loan is then uses to pay off all others unsecured loans. The collateralization of the loan allows a lower interest rate that without it, but for the exchange, the owner need to agree to allow the forced sale (foreclosure) of the asset to pay back the loan if the owner default the loan repayment.
When the debtor is in danger of bankruptcy, the debt consolidation companies can help the debtors to get a discount amount of loan which agreed by the creditors. Once this is done, the income and expenditure of the borrower falls into a manageable balance. A prudent debtor can shop around for debt consolidation companies who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Benefits of Debt Consolidation
- Lower Monthly Payments – Lower payments puts more cash in your hand each month. Debt consolidators can reduce your monthly payment up to 50% in some cases, while still paying off your bills in less time.
- Reduction in Credit Card Interest – Reducing interest means that by making payments you are actually paying off your debt, instead of just covering the amount of interest. This can reduce your time to pay off your debt by 10 or more years!
- One Monthly Payment – Instead of making multiple monthly payments to creditors, you make one monthly payment to the debt management company.
- Improve Credit – Many creditors will "re-age" your account, bringing your accounts current, when you being the debt consolidation plan. This will improve your credit rating. Paying off your debts entirely will also improve your rating.
- Late and Limit Fees Gone – Once in a debt consolidation program, creditors will eliminate late and over the limit fees. Then, creditors will usually apply that money to your balance.
- End Creditor Harassment – Enrolling in a debt consolidation program will usually end creditor phone calls. However, if a creditor still call your, your debt consolidation firm will usually resolve the issue on your behalf.
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