Debt consolidation is to take out a single loan to repay several others. This is mostly done with a view to securing a reduced or a fixed interest rate or on account of the convenience of having to manage a single loan.
Debt consolidation can mean converting few unsecured loans into another loan, which is unsecured. However, more commonly debt consolidation refers to getting a secured loan against collateral, especially a house. Loan collateralization brings in lower rate of interest as the lender's risk is reduced.
What does a debt consolidation company do?
Debt consolidation companies typically discount the loan amount. The debt consolidator buys the loan at a discounted price from a debtor who is in the brink of bankruptcy. A wise debtor generally shops around for consolidators who create proper debt consolidation strategies to help them manage with the debt situation.
Debt consolidation offers a wise solution for a borrower entrapped in heavy credit card debts. Credit cards carry heavy interest rates. Debtors in possession of such properties like a home or a car can go for a secured consolidated loan.
What is a debt consolidation program?
Debt consolidation programs are actually debt repayment programs. They do the work of consolidating different kinds of unsecured debts like credit card debts and personal or student loans. You have to choose upon the accounts you wish to enter for the program at the time of your joining. Once you are enrolled, the debt consolidation company will be contacting your creditors for negotiating better repayment terms, and probably reducing your rate of interest, and also work towards eliminating late fees. You have to send the particular company a lumpsum every month, which will be distributed to the creditors you have enrolled into the account when you joined.
Debt consolidation loans - merits and demerits
It is often said that debt consolidation loans are actually nothing but home equity loans. These loans utilize the equity that has been built up in your present home loan to pay back all the unsecured debts. Sometimes debt consolidation loans can come with heavy fees during the application process. The time period required to clear off the debt might also go up. Since this type of loan usually converts your unsecured debts into a secured debt which is backed by your house, you could very well be losing your place to stay.
However there are obvious advantages to debt consolidation loans. These loans give you an overall low rate of interest. This entails having to pay less for your loans of the past.
You will be required to pay a fixed rate of interest thus reducing unpredictability with regard to your financial planning for future.
A very distinct advantage of debt consolidation loans is that you are saved of the hassles of managing as well as keeping a track of multiple loans which could be taxing for you. Managing so many loan accounts may lead to confusion and unintentional mixing up of payments. A single consolidated loan puts an end to this sort of trouble.