DEBT CONSOLIDATION LOANS
Debt consolidation involves taking out one loan in order to pay off many others. The borrower is able to secure a lower interest rate or a fixed interest rate and the important thing is that only one loan needs to be serviced.
Debt consolidation can be achieved by taking out an unsecured loan and settling a number of other unsecured loans but in most cases a secured loan is taken out by putting up an asset, most often the borrower's house, as security in case of default.
By doing this, the borrower is able to negotiate a lower interest rate and probably a longer repayment period because the risk to the lender is reduced.
If the debtor should happen to get into difficulties he may be in danger of bankruptcy and under these circumstances companies called debt consolidation companies may buy the loan from the lender at a discount.
A debtor with prudent attributes might look around for consolidators who may pass on some of the savings. Such an action can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate should be weighed carefully.
The time for debt consolidation can be advisable when a large amount is owed against credit cards, which carry very large interest rates, even when compared with an unsecured loan from a bank.
However a secured loan using a house or a car as collateral is often able to command lower interest rates. Then the total interest and the total cash flow paid towards the debt is lower, enabling the debt to be paid off sooner, incurring less interest overall.
In practice, many people incur large credit card debt because they spend more than their income. If that habit continues they will not benefit from consolidation because they will simply increase their credit card balances again.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, high fees may be charged by companies taking advantage of this fact and sometimes the fees are close to the maximum allowed.
In addition, some unscrupulous companies may wait until clients have backed themselves into a corner and must consolidate in order to pay off bills where they are far behind in paying. If the client does not refinance he may lose his house so they may be willing to pay any allowable fee in order that the debt consolidation may go ahead.
In some cases the borrower may not have enough time to shop around and may not even be aware of other lenders with lower fees. This practice is known as predatory lending. Certainly, many, if not most debt consolidation transactions do not involve predatory lending.
Your home may be repossessed if you do not keep up repayments on your mortgage.
All loans and mortgages are secured on property. Think carefully before securing other debts against your home.
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