What Is Debt Consolidation?

what is debt consolidation
by infomatique

What Is Debt Consolidation?
Debt consolidation means taking out one loan to pay off many others that secures a lower interest rate and a fixed interest rate or for ease of servicing one loan only. Generally, it involves a secured loan against an asset that serves as collateral most probably a house. In such case a mortgage is secured against the house. Since, by collateralizing the asset owner agrees to allow the forced sale of the asset to pay back the loan. All this involves minor chances of risk to the lender so the interest rate offered is lower. Sometimes a heavy discount is provided by the debt consolidation companies on the amount of the loan. The decision to consolidate must be taken carefully as consolidation affects the ability of the debtor to discharge debts in bankruptcy. As compared to an unsecured loan from a bank a debt payment by credit card is more beneficial as credit cards carry much large interest rate. Debtors those having property whether it may be a car or home get a lower rate through a secured loan by using their property as collateral. As a result of this the total interest and the cash flow paid towards the debt is lower which ensures the debt to be paid off sooner incurring less interest. Companies that are engaged in these debt relief programs are well-versed in dealing with various types of creditors, like mortgage companies, banks, credit card companies etc.

They are the great rescuer as they interact with creditors to reduce the amount of money you owe to them and can even convince creditors to cut back on the interest rate on your previous borrowings, thereby assisting you in finding your way out of this debt-ridden situation.
What Is Debt Consolidation ?
Debt consolidation means taking out one loan to pay off many others that secures a lower interest rate and a fixed interest rate or for ease of servicing one loan only. Generally, it involves a secured loan against an asset that serves as collateral most probably a house. In such case a mortgage is secured against the house. Since, by collateralizing the asset owner agrees to allow the forced sale of the asset to pay back the loan. All this involves minor chances of risk to the lender so the interest rate offered is lower. Sometimes a heavy discount is provided by the debt consolidation companies on the amount of the loan. The decision to consolidate must be taken carefully as consolidation affects the ability of the debtor to discharge debts in bankruptcy. As compared to an unsecured loan from a bank a debt payment by credit card is more beneficial as credit cards carry much large interest rate. Debtors those having property whether it may be a car or home get a lower rate through a secured loan by using their property as collateral. As a result of this the total interest and the cash flow paid towards the debt is lower which ensures the debt to be paid off sooner incurring less interest. Companies that are engaged in these debt relief programs are well-versed in dealing with various types of creditors, like mortgage companies, banks, credit card companies etc.

They are the great rescuer as they interact with creditors to reduce the amount of money you owe to them and can even convince creditors to cut back on the interest rate on your previous borrowings, thereby assisting you in finding your way out of this debt-ridden situation.

Due to the economic crisis, majority of people have been forced to face serious financial situations. Due to their incomes reducing drastically, on account of job losses or business losses, they are finding it hard to keep up with the credit card payments, home loan payments, personal loans payments etc.

Their debt continues to increase day by day as they try to manage their debts by paying off either the interest amount / taking another loan to repay the previous one. In such a scenario, where a person is faced with a lot of debts originating from various sources, one can think of the option of Debt Consolidation.

In simple words, Debt Consolidation is a process involving taking out a single loan to pay off many other loans. Most of the times, it is done for the following reasons:-

To have only one loan to service. This reduces the tension on the part of the borrower as he needs to focus on repaying only one loan, instead of repaying a multitude of loans which he had earlier.

To secure lesser rate of interest as compared to what they have been paying for other loans

Debt consolidation is also considered for securing a fixed rate of interest on a single loan as opposed to paying variable interest rates on different loan amounts.

Although debt consolidation can entail consolidating various unsecured loans into another unsecured loan, but most of the time, the lenders prefer to have some sort of collateral.

If a person is troubled with a lot of unmanageable loans and can offer his own house as a collateral / security, then it can make the process of debt consolidation easier, as in this case the lender has to bear lower risk as a result he is in a better position to offer lower interest rates.

This eventually benefits the borrower who is going in for Debt consolidation.

I would be further continuing on this topic in my upcoming articles……

I hope you have enjoyed reading this article. As always, comments are Welcome and Encouraged. Cheers……….

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