Articles & News About Your Credit

The Basics of Credit Consolidation

In essence, a credit, or debt, consolidation is the act of receiving 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. When monthly payments become overwhelming many people look to consolidation as the solution to their financial hardship situation. This article will help the consumer decide if a consolidation loan will be beneficial or simply prolong the principal repayment.

Credit consolidation can simply stem from a number of unsecured loans into another unsecured loan, but more often than not it involves a secured loan against an item or asset that would serve as collateral?often times a house. A mortgage is usually placed and secured against the house to lower interest rates. By collateralizing, the asset owner agrees to allow the forced sale, or foreclosure, of the building to pay the loan, which in turn reduces the risk involved ? for both the lender and borrower?thereby reducing the interest rate offered.

Occasionally, credit consolidation companies will offer a discount on the total amount of the loan. When the debtor is in danger of bankruptcy, the consolidator will buy the loan at a discount. A thrifty debtor can shop around and will usually find some consolidators who are willing to pass along some of the savings. When considering consolidation, make sure to weigh the decision carefully as it can affect the ability of debtors to discharge debts in bankruptcy.

The theoretical advantages that debt consolidation offers to a consumer that has high interest debt balances are numerous, allowing companies to take advantage of the benefit of refinancing to charge very high fees in the debt consolidation loan. On the contrary, debt consolidation is often advisable in theory when someone is paying credit card debt. Credit card debt can carry a much larger interest rate than even unsecured loans from a bank. Collateralization is advisable here as well as it allows for a lower rate through a secured loan thereby making the total interest and the total cash flow paid towards the debt lowered allowing the debt to be paid off sooner, incurring less interest.

Be aware that 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 are already behind on minimum payments. Meaning if the client does not refinance, they may lose their house or car, i.e. the collateral, forcing the client to accept interest rates much higher than they would during a time of financial stability. To put it into other words, 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. The combination of these factors gives rise to deceitful ?Predatory? lenders who try and take advantage of people in dire situations. At this point it is exceedingly important for the debtor to make educated and thoughtful decisions, even in the face of growing financial pressure.

Daniel Cho is a financial writer www.selectdebtrelief.com specializing in consumer debt and alternatives to bankruptcy. Currently he studies Business and Theatre Performances at the University of California at Berkeley where he is an active member of the Lambda Phi Epsilon Brotherhood- Delta Chapter, and Theatre Rice- Modern Asian American Theatre Performances.

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