Debt consolidation generally means cancelling/paying off multiple debts by taking a large single loan. It is done with the aim either settling on a fixed interest rate or for securing a lesser interest rate. Debt consolidation can also help clear off multiple debts in various quarters and the borrower has the ease and convenience of paying off only one loan at a fixed interest rate.
How does Consolidation work?
You can consolidate your debts by streaming multiple unsecured loans into a fixed single unsecured one but this system is rare nowadays. Most debt consolidation options involve the processing of two or more unsecured ones into a single loan. Such a loan is usually secured against an asset as collateral.
If the asset in question is a house, the debt is secured against the particular house. Using a high equity asset can help lowering the interest rates. The lender is happy to get security and in a case where the borrower is unable to pay off the loan, the lender can foreclose the asset.
If you have run up huge credit card bills or you have taken up several high interest installment loans like vehicle loans and student loans, debt consolidation could be the answer to your problem. You will be able to process several heavy debts into one achievable payment plan.
If you cannot manage your multiple bills, you will end up paying a lot more in terms of late charges, fines and added fees. To top it all, you can also be labeled with a bad credit record; this will make it difficult for you to get loan sanction in the future.
A consolidated debt will have reasonable and fixed interest patterns and you will be able to pay off your dues at spaced intervals thereby eliminating confusions about multiple payments.
If you find that the interest rate on your new consolidated loan is no better than your previous interest rates, it makes no sense to consolidate your debts.
Debt consolidation means paying off debts for a longer time period. The amount involved is the same but the time for paying off the debts is stretched out so that you don’t feel the financial pressure. However, if the term is extremely long, you might end up paying more interest.
You will generally have to offer a high equity asset as collateral for getting debt consolidation. If you fail to pay off your debts in time the lender can legally force you to sell off your asset to pay off your loan. This is a big risk and you must be utterly confident of saving your assets before you apply for consolidation.
The perfect solution
For somebody on the verge of bankruptcy, looking around for debt consolidation firms who can discount the loan amount is the best option. Debt consolidation is a decision that can impact your financial future in a major way so it’s best to take the help of a financial advisor.
Generally, debt consolidation is advised for managing credit card debts. Again if you own lots of fixed assets and are not particularly concerned with losing a particular mortgaged asset, consolidation can be good for you.
The real trick here is to learn from you past mistakes and don’t jump head long into debt the first chance you get.