Understanding Debt Consolidation

by:Gibran Selman

Debt Consolidation is typically the process of taking one loan to pay off a number of other loans. These loans give consumers the chance to consolidate a number of high interest loans into one monthly payment with a low rate of interest. This obviously sound too good to be true. You could naturally ask yourself "Why would a creditor accept less money than is owed to him?" The answer is simple. Considering the number of people who struggle with their debts and file for bankruptcy,the concept of debt consolidation is a better alternative for creditors who would at least be able to claim some amount of money,if not the total amount. The benefit extends to the struggling individual who can use debt consolidation as a means to re-establish their credit rating and avoid the humiliation of filing for bankruptcy.

There are two kinds of debt consolidation loans, namely Home-equity lending and Personal lending. The former type is ideal for those whose paypacks have taken a beating, or those out of job, or divorced. The collateral in this debt consolidation loan is the house, which is mortgaged, forcing the owner to sell the house if they fail to repay the loan. This mortgage provides a safety net to the creditor organization, thereby permitting lower interest rates. The personal lendinmg loans are not secured with a collateral, and thus have higher rates of interest.

The decision to opt for debt consolidation is a tough one, and should be taken after adequate deliberation. Recent reports show a growing segment of the population lumping their debts onto their mortgages, or taking a loan against their property. Despite the fact that the monthly installments would be lower in this case, the overall amount paid on repaymetn, works out to a higher amount, due to the duration of the debt consolidation loan. There are alternative options where unsecured debt is eliminated via a specific payment plan or a settlement. The loan is not converted to a secured debt. The nitty gritties of debt consolidation can be confusing to the layman. Is always advisable to take the help of a financial advisor, when opting for these loans.

Debt Consolidation should be considered only by those knee deep in debt, trailing behind on due payments, getting warnings from collection agencies and attorneys.It is not an option for those who are capable of paying off their debts without specific aid. Though debt consolidation services may tout it as a great way to steer away from paying your debts,it may actually cost more than it would have, had you paid off your debts yourself. Considering the various aspects, I really believe that debt consolidation is a great solution for all the parties concerned.