Know More about Debt Consolidation
When we think of debt consolidation, we think of securing one loan to pay off one or more other debts. Most of the time, debt consolidation is done to lower interest rates and consolidate payments. Sometimes it is to avoid bankruptcy that would surely result from crippling interest rates on such things as credit cards or short-term loans like payday loans.
The scenario is all too familiar. Neil runs out of money before his next pay check because he has unforeseen car problems. Thus, he is unable to make his mortgage payment. Rather than wreck his good credit rating, he takes out a short-term or “payday” loan, but when his pay check arrives, he is unable to make the loan payment because the washer needs to be replaced. Forfeiting on the payday loan involves a larger loan at higher interest. Now, Neil is in trouble. He has a car payment, a mortgage payment, and now the high-interest payday loan. His bank advises him to think about loan consolidation before he misses a mortgage payment.
This is one example of how people get themselves into crippling debt. Sickness, unemployment, appliance malfunction, gambling debts, trips, houses, furniture or clothes are a few things we cannot resist that can quickly land us in debt. These debts seem insurmountable without help. Many have lost homes, families and life savings because of this debt.
This is where debt consolidation comes in. Folding debts into one loan that lowers the interest rate, thus lowering the payments, debtors are able to avoid a negative credit rating. Debtors work with a consultant to decide how much they can pay off each month. Several payments become one. There is a plan for getting the debtor out of his/her financial mess.
It’s possible for debt consolidation companies to offer a discounted loan principal. If bankruptcy is imminent, the lending facility is just glad to get out from under the loan with as much of their money back as possible. When credit card interest rates are high, then debt consolidation is often a wiser option than trying to pay off the credit card balances.
Another option is to consolidate debt through refinancing. If your home’s value has increased you can use this equity to take out a second mortgage on your home and use the money to pay off a high-interest debt. In today’s financial climate, this is not likely an option since homes have decreased in value.
Another way to consolidate debt is to take out a personal loan. You don’t need collateral or assets to get a personal loan, although the lending institution will ask you to prove employment, salary and will ask about your other expenses.
A third way of debt consolidation is debt settlement or loan modification. You can cut the principal owed, your monthly payments and/ or interest rates. This is not as simple as it might appear. There are complex terms and provisions. The high rate of dropping out of debt settlement arrangements would testify to the difficulties encountered using this method of consolidating debts. Another down side of a loan modification is that it messes up your credit rating and will negatively affect securing future loans. The advantages of debt management are that debtors receive counseling about how to downsize their debt and how to stay out of debt.
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