Debt Consolidation Pros and Cons

Before you decide to refinance your debt you should spend time understanding pros and cons of debt consolidation. Most Americans have average outstanding dues of around $6,000 which is why debt consolidation companies are in so much demand. You just cannot miss the commercials on billboards, television, internet and newspapers. The question is, are they really as good as they are projected?

Debt consolidation – what is it and how does it work?

Debt consolidation involves taking out a new loan big enough to repay all your outstanding unsecured debts in one go, leaving you with just one debt.

This basically means that instead of making multiple payments to multiple creditors each month, you would make just one payment to one creditor per month until all your debt (plus any interest it has accumulated) has been repaid.

The good thing about this is that, interest rates and late charges of your debts from the institutions you’ve borrowed money from will no longer get all your monthly pay. You can pay back your debts at a lower interest rate with one company than when you pay for them separately. Collective interest rates from all these creditors result to bigger amount than the interest rate with one sole creditor.

This process usually involves a secured loan against some type of collateral. Some people use the equity in their home as collateral. This can sometimes work to your advantage because the collateral could help lower your interest rate somewhat because you are in effect agreeing for the sale of your home if you default on your consolidation loan. The lender may be willing to allow a lower interest rate because his risk is somewhat lower if you are putting your home on the line.

Many times the firms also discount the loans. In case a debtor is going to get bankrupt, the debit consolidator allows buying the loan at a discount. If a debtor is a bit cautious in such a situation, he may search for some consolidator to buy his loan and pass on to him a portion on the discount to save something. A borrower has to be very careful before going for a debit consolidation. As this is against a secured loan and if for any reason the borrower goes bankrupt, he will not be able to repay the loan and may lose his assets.

Debt consolidation Pro

You will be able to get a lower payment than all your payments combined, which can be very manageable. By consolidating your debts you will be able to eliminate a lot of interest, late fees, and other charges that you are currently paying. Plus most debt consolidation programs will get you a payment you can manage.

Debt consolidation Con

Another of the possible negative consequences regarding the debt consolidation is of a more personal nature. This relates to discipline; as you may well have paid off all your debts you should ideally not incur any further debts until you have settle your loan account. However, some people continue to open new accounts and get themselves into deeper debt, almost double of what they were in before they elected to do the debt consolidation. Hence discipline and self control should be the order of the day, if you decide to go this route.

Consolidating your high interest credit can help pay off your debt by providing structured payments. You can also lower your interest rates, making repayment easier. However, be aware of the costs and shop around for low rates and fees. To get the most out of a consolidated loan, choose short terms to avoid making large interest payments.

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