Why Consider A Consolidation Loan
Too often people find themselves in debt and cannot keep up with the payments they are required to make
. Sometimes it is from simple mismanagement of their finances but other times it could be because they lost their job or their ability to earn an income. Rather than declaring bankruptcy, if you are in debt, you should first look at other options available. Two of these options are debt settlement and debt consolidation. For those whose debts are under $10,000 or those who are in debt as a result of simple mismanagement, debt consolidation provides a simple and structured way to get back on track. Here are a few things you need to know about debt consolidation.
What Is Debt Consolidation?
Debt consolidation is not the same as debt settlement. Debt consolidation involves a third-party organization that negotiates lower interest rates and longer payment terms so you can service your debt in a way that it is manageable. The third-party organization then consolidates your debt into a single loan and payments are scheduled according to what you can afford. In many ways, it is similar to debt counseling. The organization will take a look at your income and expenses, and help you to structure a plan whereby you can clear your debts and get back on to an even footing. It helps you the clear your debt because you generally pay less interest with each installment and are able to make inroads into the capital amount of the debt. The term of the loan is also often lengthened so you can pay what is affordable and still be able to clear your debts.
What Debt Consolidation Is Not
It's important to understand that debt consolidation does not decrease the actual amount of the debt value. You will not pay less of the capital amount of debt with a consolidation loan; you will only pay a lower interest rate and have an extended loan term. Negotiating to decrease the debt value is known as debt settlement. It involves proving that you are unable to service your debt and the process is much more complicated than debt consolidation. It is also not something that is suitable for everyone. With debt settlement, there are more conditions attached and it will affect your long-term credit ratings.
Who Should Consider a Consolidation Loan?
A consolidation loan is suitable for someone who has a relatively small amount of debt but is unable to manage it. In terms of industry standards, this is generally considered to be anything below $10,000. Debt consolidation is mostly used to clear credit card and other unsecured forms of debt such as shopping accounts. You may be paying the minimum amount required but this may just cover the interest, meaning that you are never really servicing your debt. A consolidation loan company will help you analyze your income and expenses and set up a payment structure. If you are unable to manage your finances properly or simply need help with figuring out how to get out of debt then debt consolidation could be for you.
How Does Debt Consolidation Work?
With debt consolidation, a third-party company, usually required to be a non-profit organization, negotiates with your creditors that you pay lower interest rates and can pay off the debt over a longer term. During this time, the credit cards and accounts which have caused you to be in debt are usually frozen until such time as the debt is fully serviced. For this, the debt consolidation organization charges a fee which is usually around 14 to 16 percent of the debt amount. The organization should also be a registered member of industry associations and adhere to recognized practices. They should also give full disclosure of their fee structure. Keep these things in mind as there are some less reputable debt consolidation organizations out there.
Benefits of Debt Consolidation
The immediate benefit of debt consolidation is that it provides you with a structured and manageable way to clear your debts. As an added benefit, the process usually teaches people sound principles for money management that they can apply to their lives. Often when you use a debt consolidation loan to clear your debts, you can regain a good credit record. Companies are more interested in extending credit to people who show they will make an effort to meet their debt obligations. Another benefit of debt consolidation is that you pay lower levels of interest on your debts and can therefore pay more of the capital amount you owe.
by: Eric Targan.
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