Debt Consolidation
Debt Consolidation Loan & Other Debt Consolidation Programs
Do you want to consolidate debt? Debt consolidation is accomplished by taking out one loan to pay off several (or many) others. This is often done to secure a lower combined monthly payment, a lower interest rate, secure a fixed interest rate or simply for the convenience of only making one loan payment each month.
You can consolidate credit card debt by transferring all higher interest balances to a lower interest card or you can consolidate debt by taking out a home equity loan or debt consolidation loan. These are usually much lower interest loans, so more of each monthly payment actually goes toward reducing the amount of principle you owe.
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. A prudent debtor can shop around for consolidators 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.
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house.
The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. The lender's risk is reduced so the interest rate offered is lower.
Credit Card Debt Consolidation
Debt consolidation is often advisable when someone is carrying a large amount of credit card debt or other high interest debt. Credit cards can carry a much higher interest rate than even an unsecured personal loan from a bank so it makes sense to consolidate debt at that point. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral so they can consolidate credit card debt, apply more principle toward the debt pay down and thus get out of debt sooner.
Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.
