debt consolidation

debt consolidation Debt consolidation occurs as taking out 1 loan to pay off lots of others. It is often done to secure lower interest rates, a fixed interest rate or for the convenience of servicing only 1 loan. Debt consolidation can 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. 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 risk to the lender is reduced so the interest rate offered is lower. Sometimes, debt consolidation companies can discount the amount of the loan. When a 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 is often advisable in theory when someone is paying credit card debt. Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Debters with property such as a home / car may get a lower rate through a secured loan using their property as collateral. Then the total interest & the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. Also some unscrupulous companies will knowingly wait until a client has backed themselves into a corner & must refinance in order to consolidate & pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees & may not even be fully aware of them. This practice is known as predatory lending. Certainly many, if not most, debt consolidation transactions do not involve predator style loaning.

devt consolidation

Debt Consolidation