The Basics of Debt Consolidation

Debt consolidation is essentially a type of debt refinancing which involves taking out one loan to repay many others. This commonly refers to an individual finance method of people dealing with high consumer debt, usually but not always, dealing with a firm specializing in debt consolidation. The theory behind debt consolidation loans is that consumers (or businesses) take out another loan in order to pay off debt that they have accumulated through credit card use or home equity loans. It is widely accepted in the financial world that the aim of consumer debt is to buy things on credit; the theory therefore goes that if the consumer can only afford to pay off their debt on one level – say their mortgage, for example – then they will end up consolidating their debt on this basis, in an attempt to get rid of the debt as quickly as possible in order to avoid any potential negative impact on their credit score.

In theory, this sounds sensible, but in practice the theory can cause problems. In many instances this means that the end result is that the consumer is left with a higher monthly repayment, or one which has a lot more interest fees attached to it. Consumers are not necessarily thinking carefully about how they will get out of debt, and tend to take on further debt in the hope of being able to consolidate their debt more effectively. They may also have an unrealistic idea of what the value of their house is. The result is that they can end up spending much more than they should be on their mortgage or their house.

In the face of all this, some people just give up. However, there is an option available for those who don’t want to continue with their debt consolidation. It’s called ‘payday’ loans; the way in which these operate is that the borrower takes out a single monthly payment for a set period of time. As long as the repayment terms are kept to the stipulated period, then after the repayment period has expired, the loan is paid off and the borrower is left with a single monthly payment which is often significantly lower than the combined amount of their previous debts.

There are a few things to consider with these kinds of loans. For starters, they are only a good option for those who have a steady income. If the payer has a fluctuating income, they may find that their new loan is considerably more expensive than the combined total of their previous debts. The alternative is simply to carry on, making only the single monthly payment – however, the chances of this happening are relatively low. This means that payday loans are never a good option for debt consolidation.

Debt consolidations do qualify for a secured loan against property. This way, the consumer is not putting their home up against their debts. However, there are qualifications to be fulfilled in order to secure this type of loan and it is important that the individual understands exactly what they are before applying. It is important to remember that whilst the interest rate may be lower than the rates on the individual loans themselves, this does not mean that the individual will qualify for a larger sum of money. In order to secure the best deal for them, it is essential to compare the different offers from several creditors.

The good news is that many lenders offer this type of debt consolidation loan. The bad news is that many of these lenders charge very high interest rates. Those looking to consolidate their debts should therefore do their research and compare the different offers from the various lenders. Those who do qualify for the lower interest rate loans will find that the amount they pay back each month will be considerably lower than the amounts they were paying before.