- Debt Consolidation-
Debt
consolidation
Debt consolidation entails taking loans to pay others off.
This is often done to secure a lower interest rate, secure a fixed interest rate
or for the convenience of servicing only one loan.
Bringing all your debts
together under one personal loan is one way of regaining control, although it
isn't the best solution for everyone. A consolidation loan is usually taken over
a much longer period than smaller debts, so this can keep you in debt longer and
increase the overall interest paid. You can even end up paying interest on interest.
Because you are bringing all your debts together, there may be less chance of
negotiating reduced payments with a lender than if you kept the smaller loans.
This means you may have less flexibility and more to lose if you don't keep up
your repayments. Some lenders only grant debt loans to their existing customers
and most will ask you for a list of your debts. Others will ensure that the loan
fulfils its purpose by paying your debts for you.
Steer
clear of loan sharks and credit brokers in classified ads, who are more likely
to saddle you with more debt than you had before. Seek financial advice before
getting consolidation loans to ensure one is not simply increasing overall debt.
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 as collateral, which is 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 in order 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 loan. When the debtor is in danger of bankruptcy, debt consolidator will buy a loan at discount. A prudent debtor can shop around for consolidators who will pass along some savings. Consolidation can affect ability of a debtor to discharge debts when bankrupt.
Debt consolidation is advisable in theory when someone is paying credit card debt. Credit cards carry much larger interest rate than unsecured loans from banks. Debts with property such as a home or car may get lower rates through secured loans using property as collateral. The total interest and total cash flow paid towards debt is lower allowing debt to be paid off quicker, so less interest paid. In practice, some are in credit card debt because they spend more than their income. If such a habit carries on, consolidation will not benefit much as they will increase their credit card balances again.
Because of the theoretical advantage debt consolidation offers a consumer with high interest debt balances, companies often take advantage of benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes the fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait for a client to back themselves into a corner and must refinance in order to consolidate and pay off bills they're behind on the payments. If the client does not refinance they may lose their house, so they're willing to pay any allowable fee to complete the debt consolidation. In many cases the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending.
In
the US, federal student loans are consolidated in different ways, and as federal
student loans are guaranteed by the U.S. government. In a federal student loan
consolidation, existing loans are purchased and closed by loan consolidation companies
or by the Department of Education, depending on what type of federal student loan
the borrower holds. Interest rates for the consolidation are based on that year's
student loan rate, which is based on the 91 - day Treasury bill rate at the last
auction in May of each calendar year.
Some
organizations claim to be not for profit but are really the same old loan sharks
trying to claim to be something they are not. Allways be careful to chekc it is
a real charity or voluntary group.
http://www.loanconsolidation.ed.gov/ US Government Loans to Consolidate Educational Debt
http://www.ftc.gov/bcp/conline/pubs/credit/kneedeep.htm Federal Trade commission
http://www.debtcounsellors.co.uk/ Free advice from website for UK
http://www.cccs.co.uk/ Consumer Credit counselling service
http://www.surfinthespirit.com/advice/charity-intro.shtml Religious website offering advice on debts
http://money.independent.co.uk/personal_finance/loans_credit/article96719.ece Independent Artcile on Debt consolidation
http://www.bbc.co.uk/radio1/onelife/finance/debt/debt_action2.shtml Advice from BBC on debt consolidation
http://money.guardian.co.uk/calculator/form/0,,590748,00.html Guardian debt consolidation calculator
http://www.creditinfocenter.com/FeaturedArticles/ameridebt.shtml Article advising where not to get debt consolidation
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