Posts Tagged ‘Debt consolidation loans’
About Debt Consolidation
Many consumers are considering debt consolidation to help lower their bill payments in today’s unstable environment. Whether this is a wise decision depends on the circumstances, the types of debt one is looking to consolidate and what interest rate is offered. It is also important to learn helpful advice on avoiding predatory lenders.
Identification
Debt consolidation is the practice of taking out a large loan to pay off many other loans, usually with higher interest rates. This is very common practice when one has multiple high-interest credit cards and is having a hard time making the minimum monthly payment on each.
Debt consolidation companies work with lenders to negotiate a payoff amount and interest rate so consumers will have one low, monthly payment. There are pros and cons to debt consolidation, and it is wise to look closely at the process and decide if it is the best course of action depending on the circumstances.
Features
Some debt consolidation loans are in the form of an unsecured loan, but most often the new loan is secured against collateral, usually a home. Because of the collateral, the lender’s risk is reduced, therefore allowing a lower interest rate for the debtor.
What this means is that if the debtor defaults on the new loan, his home will be foreclosed on and sold to pay back the loan. In the case of an unsecured debt consolidation loan, the lender will negotiate to lower the interest rates and payback amount with each creditor, but often this rate will not be as low as with a secured loan.
Benefits
Debt consolidation offers the greatest benefit to those paying back credit card debt as opposed to other types of loans. The reason for this is that the interest rates on credit cards are normally much higher than even an unsecured loan.
For debtors that have collateral such as a car or a home, then a secured loan’s interest will be even lower, allowing the debt to be paid off sooner, incurring much less interest. In the meantime, payments are being made on time to each creditor, avoiding delinquency or improving the debtor’s credit score if he is already behind.
With consolidating lower interest loans, the benefits are not as great, for the interest rate on the debt consolidation loan may not be much lower and it may actually stretch out the life of the loans. The debtor may end up paying more by the end of the loan than if he had managed his loans and paid them off on his own.
Effects
The effects of debt consolidation are a concern for many. Interest rates and payment amounts need to be carefully analyzed to be sure that the amount paid back is not, in fact, more than if the loans had not been consolidated. Others may be concerned with how consolidating debt will affect their credit.
In most cases, credit score will not be affected much one way or the other. However, it can sometimes take months to have a debt consolidation application approved by debtors and accounts can go unpaid for that time, thus showing up as delinquency on a credit report. Read the rest of this entry »