Debt Consolidation: Debt Consolidation Loan

People love to take loans. "Live in today, forget about tomorrow", that seems to be the mantra for the younger generation. So people take loans. Loans for house, loans for buying accessories, loans for shopping, loans for everything. However, one cannot ignore the dangers of such irresponsible decisions, once they are caught in the grip of the recursive loan repayment. At that time, the so called Debt Consolidation or "Debt Consolidation Loans", appear to be one of the available options.

Wnat more explaination on Debt Consolidation? Let's take an example:
Nick has taken a house loan from Bank of America. He has to repay that loan to the Bank by making a monthly payment of 5,000 per month. He also has an Auto Loan for buying his car, for which he is paying 300 per month. Then, his family shopping exceeded the budget last month, and he used his credit card to pay for the bills. Here, he has to make a payment of 150 per month for his credit card arrears.

Now comes the most important part. Nick's Home loan lender charges him 5% interest rate, while the Auto loan lender charges him 7% interest rate. The credit card company is a bit bad, and it charges Nick a high amount of 15% interest rate.
Also, the tenure for all these loan repayment varies. House loan may be repaid in 10 years, Auto loan in 5 years, and credit card debt in 8 months.

So what can Nick do to get rid of all these varying interest rate loans and varying duration. Here comes the concept of Debt Consolidation.

What is Debt Consolidation Loan?
Debt consolidation loan allows 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.
In case of Nick, it would mean that a bank or a financial services company can offer a single loan to him as a Debt Consolidation Loan, and it will make the early payments for all the 3 loans for Nick. After taking the Debt Consolidation Loan, Nick will be left over with only one loan to be repayed, and that will be the Debt Consolidation Loan.


So what is Debt Consolidation?
Debt consolidation 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, most commonly a house. In the case of Nick, 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 to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower.

How should one apply for Debt Consolidation Loan?
The biggest concern here while going for a Debt Consolidation Loan is with your financial position. Since as an individual, Nick already has 3 big loans to take care of, it indicates that he is in financial trouble. If he had been financially sound, why would he look for a Debt Consolidation Loan.

Therefore, debt consolidation companies offering Debt Consolidation Loan can discount the amount of the loan, i.e. offer less loan amount then required. When the individual is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. Hence, it is important that you as a careful prudent debtor should 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.

When does it make sense to go for Debt Consolidation Loan?
If you believe that you are having big bills to pay with high interest rates, then you must seriously consider the Debt Consolidation. An example may be paying high interest rate of 18% on credit card bills, when a Debt Consolidation Loan may be available to you only for 9%. That will mean making a saving of 50% on the interest payment.
Another example can be when you have a old loan for which you are paying high interest rate, say of 12%, while due to the new market developments, the interest rate for Debt Consolidation Loan may be available for just 6%. Again, going for Debt Consolidation will help you save money.

What are the risks involved in Debt Consolidation?
It depends upon many factors:
- Have you done all the calculations for the savings that you will make if you are going for Debt Consolidation? Is that saving significant?
- Will you be charged an early pre-payment penalty by your existing loan? If yes, how much will it be? Will the Debt Consolidation Loan calculation be beneficial after discounting this calculation?
- Is the Debt Consolidation Agency offering low interst rate but charging high amount of money for the Debt Consolidation Service? If yes, will it be meaningful to go for a Debt Consolidation Loan after taking into account these charges?
- Act now, dont wait for the interest repayments to pile up and leave you in a state where you have no option to survive, but to go for a Debt Consolidation Loan, at the terms and conditions of the company. 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