Debt consolidation 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 like 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.
Debt consolidation companies sometimes 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 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.
Because of the advantage that debt consolidation offers a consumer that has high 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.
Latest Articles1: Debt Consolidations Vs Debt Settlements - When Each Particular Decision Makes Sense
Debt settlement and Debt consolidation are a part of the debt program run by the debt management companies. Customers in various debt situations visit debt counseling agencies to get rel..
2: Short-Term Guaranteed Loans Eliminate Your Financial Turmoil in Efficient Way
Time has come for you to fulfil your short-term needs with no financial hassle. Apply for short-term guaranteed loans and enjoy getting instant monetary help despite having a bad credit score. ..
3: Benefits of Secured Loans - Comes as Freebie for the Borrowers
It is often seen that as years pass, newer alternatives of older things crop up while the older things fall into oblivion. Secured loans however have withstood competition from a whole range of fina..
4: How to acquire a Higher Loan-To-Value Percentage on your Auto Loan?
Are you dreaming of a new car? You can avoid down payment and ensure higher loan-to-value percentage on your next auto loan. How you can do it? Here’s how. Often while purchasing a new ..
5: Questions to Ask from a Retirement Planning Advisor
The word retirement is admitted favourably by some and with quivering by others. It means one thing to you and presumably entirely different thing to your next-door-neighbour. Upon retirement people..