Money Saving Tips

Consolidation Debt

May 23rd, 2007

Consolidation Debt entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Consolidation Debt can simply 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. 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 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 the 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. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.

• How to Choose a Debt Consolidation Option

The most important aspect to consider when trying deciding whether to consolidate your debts is whether or not the new monthly payment for the consolidation is going to save you money on your monthly budget for expenses, and whether or not it is going to save you from paying interest and fees over the long term. In most cases, a debt consolidation (whether you decide to get a loan, use a balance transfer or a debt management company) is going to save you money over the long term and help you pay off your debts faster.

• Credit Counseling Debt Consolidation

Many credit counseling programs provide debt management programs that allow you to make a single monthly payment each month. While they don’t actually pay off your debt into a single loan, as the consumer you are making a single monthly payment to the credit counseling agency (who then pays your creditors on your behalf), so it is very similar to paying off debts with a debt consolidation loan as far as your monthly payments are concerned.

• Balance Transfers

If you have a handful of credit cards with high interest rates, sometimes it can be beneficial to consolidate them by moving them all to a lower interest rate credit card. Just be sure to pay attention to the promotional offers with the lower interest rate credit cards- to make sure that you have a long period of time of low (or even no) interest. Also be sure to check to see what your interest rates will be once the promotional period ends, to make sure it isn’t going to jump sky high after a few months.

• Debt Consolidation Loans

In most cases, individuals who have several credit card accounts and/or unsecured loans can benefit greatly from obtaining a new loan that is large enough to pay off each of the smaller accounts. The debt consolidation loan can either be another unsecured loan from the bank or a secured loan if you own a home or vehicle. Using secured loans is always a little risky because if you are unable to make the payments the loan provider can take your collateral (your home or your car, for instance), so consider this option carefully before signing the papers.

This is a debt consolidation procedure that should only be used occasionally to make it easier to pay off a few credit cards; and is not advisable to be used repeatedly or for individuals with excessive monthly debt.

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