What is Debt Consolidation?

Debt Consolidation – What is it?

Debt consolidation basically implies taking out a single loan for paying off many others.  Many people do this as it is easier to secure  fixed rates of interest or  lower interest rates.  Also, servicing one loan becomes convenient than paying many loans.

Debt Consolidation is a strategy used by consumers for better management of their debt problems.  A financial institution consolidates the consumer’s debts and arranges a monthly payment over an extended time period which is lower so the consumer does not have to pay separate bills every month.

Debt consolidation could be the combining of unsecured loan to form another unsecured loan.  Mostly it would involve securing a  loan against collateral such as a house.  If this is the case, then mortgage would be  secured against the collateral.  By collateralizing the owner is agreeing to allow foreclosure of asset to pay the loan.  This is why collateralization  allows lower interest rates as the lenders risk is reduced.

Debt consolidation companies sometimes discount the loan amount.  If there is a risk of bankruptcy the consolidator can buy that loan at discount.  Prudent debtors would search for consolidators who could pass along some amount of the savings.  Consolidation affects the debtor’s ability in discharging debts in a situation of bankruptcy.  It is important to carefully weigh the decision of consolidating debts.

It is often advised to go in for debt consolidation when you are trying to pay of a credit card debt.  Credit cards carry large interest rates in compared to unsecured loans from banks.  If you have a house or car you will get lower rates through secured loans using your property as collateral.  Total cash flow and total interest paid is lower and this allows you to pay of your debt sooner with less interest incurred.

Technorati Tags: Debt Consolidation, collateralization, credit card debt

This entry was posted on Thursday, April 29th, 2010 at 10:40 am and is filed under Debt Consolidation Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.