Debt Consolidation Loan
Debt consolidation simply put it is the process of taking out a loan to pay off a series of loans to reduce the multiple payments and bring the total payments into one. Much of the time, a debt consolidation looks at the average interest rate among all debts and then when consolidated, lower the interest rate and possibly stretch the payments over a longer and more manageable period of time. Therefore it is done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.
In my personal experience I have consolidated many debts. When I was younger, I had student loan payments I was making, credit card payments, and car loan payments. I had nearly paid off the car that I had bought when I was 16 at age 18, however other payments where suffering. I went to a family member at the time and asked for a family loan at 8% interest from my best friends father. I had a job and worked weekends inside of their warehouse, so it wasn’t out of the question and he could deduct a monthly payment from the money I was making working for them. My average interest rate on the car loan, credit card debt, and student loan came to 11%. I ended up lowering the interest rate and after the monthly payments were said and done, the debts were all repaid within 12 months. We had a loan agreement as well which gave my friends Father a secure feeling even though it was an unsecured loan. I recommend you do the same, www.documentyourloan.net or www.kasu.ca.
It helped a lot to consolidate my loans, as did making a bit of personal extra money which I was devoted to keep doing in order to pay it down.
Simply put, debt consolidation can be debts from a number of unsecured loans into another unsecured loan, however often it also involves a secured loan against an asset like a secure line of credit. I had to do this once, with a CIBC Home Line Of Credit. I have $8,000 in credit card debts at 19.9%, I had $10,000 at 9% in an unsecured line of credit with CIBC, and I had personal debts to friends and family over about $2,000. Instead of sweating over the interest, I negotiated a home line of credit with CIBC at my mortgage rate of 3.3% or 1% below prime. It was the best mortgage at the time, so I would have been silly not to. Being debt free removed a lot of fears and I actually had the home line of credit for $25,000, giving me an extra $5,000 so I wouldn’t use my credit cards. It helped out greatly when my car broke down 6 months later and I needed the cushion.
However, it is important to know that when using a house as an asset, if you do not pay, they can force into foreclosure the house or sale of the asset being used.
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt 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.
Debt consolidation 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.
Because of the theoretical advantage that debt consolidation 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 consolidation. 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.