|
Information and description:
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.
Debtconsolidation 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.
Sometimes, debt consolidation companies can discount the amount
of the loan. When the debtor is in danger of bankruptcy, the
debts 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.
It
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 consolodation
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. Sometimes these
fees are near the state maximum for mortgage fees. In addition,
some unscrupulous companies will knowingly wait until a client
has backed themselves into a corner and must refinance in
order to consolidate and pay off bills that they are behind
on the payments. If the client does not refinance they may
lose their house, so they are willing to pay any allowable
fee to complete the debt consoilidation. In some cases the
situation is that the client does not have enough time to
shop for another lender with lower fees and may not even be
fully aware of them. This practice is known as predatory lending.
Certainly many, if not most, debt consolidation transactions
do not involve predatory lending.
See also:
•
List
of Finance Topics
• Adverse Credit History
• Bankruptcy
• Credit Counseling
• Personal
Finance
• Student
Loan Consolidate
• Credit Score
• Annual percentage rate
• Interest rate
This
article is licensed under the GNU
Free Documentation License.
It uses material from the Wikipedia
article "Debt Consolidation".
|
