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to Debt Consolidation,
your source for debt consolidation and debt settlement
information and resources. If you've reached this site,
chances are you're currently in debt and could use some
financial assistance. |
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Debt
consolidation entails taking out one loan
to pay off many others. This is often done to secure
a lower interest rate, secure a fixed interest rate
or for the convenience of servicing only one loan.
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,
which is most commonly 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
in order to pay back the loan. The risk to the lender
is reduced so the interest rate offered is lower.
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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.
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 in theory 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. In practice, many people are in credit card
debt because they spend more than their income. If that
habit continues, the consolidation will not benefit
them much because they will simply increase their credit
card balances again.
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.
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