Debt consolidation is the method of taking on another loan to pay off other loans.
In brief, you are securing one debt to pay off others. While this may sound absurd, it does make sense when you learn its mechanics.
The transfer of the debt may be done from several unsecured loans into another unsecured loan, but most of the time it is done through a secured loan which is put up against assets which serve as collateral, usually a house.
Debt consolidation could be applied for because of a few main reasons.
The aim may be to get a lower or fixed rate of interest or to make the task of paying off multiple loans much more manageable.
Debt consolidation programs are often resorted to by people who are desperate to improve their credit ratings somehow.
This could be the final attempt before filing for bankruptcy. Debt consolidation companies sometimes discount the amount of the loan, and then buy this loan at a marked down balance.
In this regard, the debtor may easily search for debt consolidators who may pass along some of the savings from the debt.
At the same time, if the debtor is unable to avoid bankruptcy, there will be no way in which he can deal with the debts that pile up.
When it comes to credit card debts, debt consolidation is one of the best ways to go.
Credit cards carry significant penalties and a relatively larger interest rate than most unsecured debts.
Having several cards, each with its own set of terms for servicing can result in higher than expected debt with longer payoff times.
People who are choosing debt consolidation can secure the loans under the security of assets such as real estate.
This results in a lower rate than the previous debts, and the total interest and cash flow paid to the consolidated debt is considerably lower.
Thus, the loan tends to get paid off sooner thanks to the lower interest charges.
Companies often charge high fees, usually the legal maximum, for debt consolidation services because of the advantages of using this option to manage debts.
Debt consolidation not only offers consumers lower interest rates by requiring one payment at a fixed rate for all debts, but also eliminating debt in a shorter time frame.
The debtor must understand that debt consolidation is a casualty controlling maneuver that requires discipline.
If the debtor is a chronic overspender, this will only be a temporary solution.
It is therefore necessary for the individual to avail him/herself of credit or debt counseling services to prevent a relapse or recurring situation.
Becoming and remaining debt free requires a new outlook on spending in relationship to earnings.
Image courtesy of renjith krishnan at FreeDigitalPhotos.net