Debt Consolidation

Debt consolidation involves taking out one loan to pay off several others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of having only one loan.

Debt consolidation programs can be very helpful in certain situations. If you are paying several different loans or credit card accounts, consolidating all of them may simplify your life because you would get only one monthly statement and make one payment. You might also find that your monthly debt payments decrease if you use a debt consolidation program that stretches your payments out over a longer period of time. This means that you'll pay out less each month and you can free up some cash.

Many people are in credit card debt because they spend more than their income. If you use debt consolidation to pay off high interest credit cards your available credit on those cards will once again be available. If you continue to use them and run the balance up again you may find yourself in even more debt and you may not have the resources to consolidate again.

Using debt consolidation programs can be a double edged sword. All these programs do is shift your debt - a debt consolidation program does not eliminate your debt. You owe the money and will have to pay it back sooner or later.

A Debt consolidation loan can be secured or unsecured. The difference is that if you get a secured load you may have to put up collateral. Collateral is usually "real property" such as a house or land. In this type of loan if you do not pay back the loan according to its terms the lender may be able to take the collateral. The risk to the lender is reduced so the interest rate offered is lower. In simple English, this means that if you do not pay the consolidation loan you could loose your collateral. An unsecured loan is one that is issued and supported only by the borrower's creditworthiness, rather than by some sort of collateral.

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. If you are careful you can shop around for consolidators who will pass along some of the savings to you. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.

Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that 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. Certainly many, if not most, debt consolidation transactions do not involve predatory lending.

Remember what you're risking by using one of these programs. Often, you'll use a home equity loan or a home equity line of credit to consolidate your debt. The consequences of falling off the payment schedule can include the loss of your home in some cases. Credit card companies can't take your home. However, if you pledge your home as collateral in a debt consolidation program then your house is fair game.