The Finance Blogger

Debt Consolidation

Debt ConsolidationWhat exactly is debt consolidation and why would you want to consolidate debt that you already have to make more debt? We will try to explain this term. Also some of the reasons why a consumer or even a company would want to consider consolidating their debts into one loan of some type or a mortgage.

Fundamentally, consumers who have multiple debts would apply for a new loan. It is with the understanding that this new loan would then be used to pay down completely the existing debt. This includes any debt on the credit cards and the personal loans that they might have. There are a number of advantages associated with taking this approach.

Advantages of Debt Consolidation

The most straightforward reason is reduction  multiple payments to multiple creditors each month. You now have only one debt and one payment to make each month. This is of course assuming that you do not continue to use your credit cards. Avoid driving up the balances again to a point where you cannot repay the balance each month. Unless you have made a substantial payment on the debt consolidation loan, there is little chance of consolidating your debt a second time.

The main reason why consumers would take this approach is actually more about saving money. Especially if you have credit cards. Credit cards as a debt instrument are very expensive. Attracting very high rates in the range of 18% for most credit cards. Upwards of 27% for store type credit cards. Consumers who only pay the minimum amount each month will be paying primarily interest and very little principle. We watched one show one night and it was going to take 10 years for this person to repay a credit card debt. This assumed that they only paid the minimum each month and did not charge any additional debt to the card.

Personal loans on the other hand range from 4% to 12% at the present time. This depends on your credit rating as well. Also whether you have a secured loan or a non secured loan. Either way there is a substantial savings in the amount of interest that you would pay each month.

Using Your Home’s Equity for Debt Consolidation

This has been a very popular approach for many consumers whose homes increased in value and / or they had paid a substantial amount down on the mortgage leaving a great deal of equity in their homes. By borrowing against this equity they are able to have a secured mortgage with a very low interest rate and they can use this money to pay off all of their other debts and reduce the amount of money the need to pay each month. Personal debt is usually based on a loan term of 5 years were as mortgages can be stretched into 25 year terms making the monthly payment much lower and enabling the borrower to have a much better cash flow.

Most people would prefer to just repay all of their debt and be debt free. If you are nearing retirement this is a goal that everyone should strive for. However many people still have debt and sometimes the best approach is to take the debt consolidation approach to limit your interest payments. Never the less the quicker you can reduce your debt to zero the better off you will be.

Bad Credit Debt Consolidation

Even if you have bad credit and find it difficult to find a lender, it is worth the effort to find a loan to pay off your debts. Any time you can save money, you will be better off. People with bad debt may have to pay a little more in terms of interest rates and possibly fees, however they will still save substantially and you may improve your credit rating as well by reducing the amount you owe as you pay the loan off each month.

If you are still confused, we will be adding more posts later this year and we encourage you to watch for them. We also suggest you speak with a lender and ask them for an explanation as well that is related specifically to your situation. They should be able to demonstrate just how much interest you will save after you consolidate your loans and credit cards.

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One Response to “Debt Consolidation”

  1. Debt consolidation is a really neat thing. It can save you a lot of money, reduced interest rates and terms.

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