Pros and Cons of Debt Consolidation – Get Out of Your Mess
Many people choose to handle their debts through a process known as debt consolidation. The objective of consolidation is to turn many debts into a single one with a lower rate of interest.
Debt consolidation is an excellent way for someone with a lot of high interest debt from credit cards, car loans, or other high-interest loans to save money in the long run, as well as improve their credit rating.
It does not, however, absolve them of the debt, and in fact it requires them to offer up some form of collateral or other item of demonstrable value in order to justify the loan.
Still, the reduced rate of interest tends to not only make the buyer’s payments much lower and more affordable, it allows the borrower to save money in the long run by paying off more of the money they actually owe and less of the interest on the initial amount.
When someone chooses to consolidate their loans, they go to a bank or other lending institution and bring information regarding all of their extant loans. This can be everything from credit card bills to car loans to gambling debts.
Most of these loans are known as “unsecured loans” because the borrower does not have to offer up anything as collateral in the event that they are unable to pay off the loan. As such, the lender needs to have a high rate of interest on the loan in order to make sure that they will gain back the amount the originally spent, plus a profit.
The rate needs to be so high that even if many of the borrowers do not pay back the loan, the company still makes money. This is why credit card debt and gambling debt are famous for their high rates of interest, since it is common for borrowers to default on them.
A consolidated loan then pays off all those extant loans and replaces them with a single large loan that is secured, in that the lender asks for collateral in the form of goods, properties or investments that they can collect on should the borrower be unable to pay.
While this means that the consolidated loan cannot be larger than the value a borrower can offer in collateral, it does mean that they can replace high-interest, unsecured debt with low-interest secured debt.
This has the downside of meaning that they lose their house or other property if they fail to pay off the new loan, however, and it also requires that the borrower own valuable and unmortgaged property that is more valuable than their extant debt.
Still, consolidation is considered better than bankruptcy for one both financially and in terms of credit rating in the long term, since it shows that one is willing and able to pay off one’s debts through one means or another.
It also means that the borrower will be able to access credit cards and take out other loans while paying off their consolidated loan, although financial expediency becomes much more important when paying off a large consolidated loan.
If you need financial advice to help you with debt consolidation or retirement planning, please contact The Life of Luxury and we can refer a certied financial planner to help your needs.