Debt Consolidation

Debt Consolidation in simple words is taking a larger loan to pay off several smaller loans. Debt consolidation could be done because of two main reasons. First is because the smaller loans each might have a high interest rate so consolidating them and getting a single large loan and paying a fixed interest may help in reducing the monthly payments. Another reason for the consolidation could be ease of management i.e. it is easier to track of payment for a single loan than multiple loans.

In debt consolidation, the larger loan is generally given against collateral which is usually a fixed asset like a house or any other real estate entity. One the lender has collateral, there is increased security for the lender and he is able to give the loan at a much lower interest rate. This is because the lender has the option of selling the collateral and recovering the money lent incase the borrower is not able to make the payment towards the loan.

A case where debt consolidation is recommended is when individuals carry multiple credit cards with high interest rates. Paying off credit card debts may turn out to be more expensive than even procuring an unsecured loan from a bank. If the individual is able to keep a fixed asset as collateral and obtain a secured loan for paying off his credit card dues he may end saving a lot more as he would incur a lesser interest rate on the loan which would translate to lower monthly payments.

Another scenario where debt consolidation may work is when a debtor is facing eminent bankruptcy. In some cases the debt consolidation firms will offer to loan at a discounted rate. This might work in favor of the debtor as he might me able to slowly start paying off his debts and recover from bankruptcy, but it may also at times severely affect the debtors ability to make higher monthly payments because of a higher consolidated loan. So the decision to go for debt consolidation must be carefully thought out.

Once enrolled in a particular type of debt repayment program the debt consolidation firm will contact and negotiate with all your creditors and agree on the most favorable method to pay off debts on your behalf. All you have to do is to make a monthly payment towards the debt consolidation company at the interest rate decide at the time of joining the consolidation program.