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Thinking About Bankruptcy
Christian Debt Negotiation
Credit Card Debt
Credit Card Debt Elimination Tips
Credit Counseling
The Key to Debt Negotiation
How Does Debt Consolidation Work?
The Key to Debt Elimination
Learning Debt Management
Which is Best: Debt Settlement vs. Home Equity Loan?
Achieving Debt Reduction
Does Debt Settlement Work?
Finding Free Debt Consultation
Get Out of Debt and Stay There
The Advantages of Home Equity Loans
Finding Online Debt Consolidation
Payday Loans
The Challenge of Student Loans
The Problem of Unsecured Debt


How Does Debt Consolidation Work?

Debt consolidation means taking out one big loan to pay off all the other debts. Often this is done to secure a lower interest rate, or obtain a fixed interest rate or for the simplicity of having only one loan instead of multiple loans. Debt consolidation can simply be moving several unsecured loans into another unsecured loan, but it can often mean making a secured loan against an asset that will serve as collateral. Often, the collateral is a home and a mortgage is secured against it. By securing the loan with an asset, it allows for a lower interest rate than without it. In case of default on the loan, the asset owner agrees to allow the mandatory sale of the asset to pay back the loan balance. The risk to the lender is less, so the available interest rate is lower.

Debt consolidation companies can discount the amount of the loan at their own discretion. If the debtor is facing bankruptcy, a debt consolidator will purchase the loan at a discount. A sharp debtor can look for a consolidator 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, thus incurring less interest. In practice, many people are in credit card debt because they spend more than their income. If that habit continues, the consolidation will not benefit them much because they will simply increase their credit card balances again.

Sometimes companies will take advantage of the debt consolidation process by refinancing to charge very high interest fees in the debt consolidation loan. These fees can be near the maximum for mortgage fees. Other unethical companies will wait until clients are desperate and have to refinance in order to pay off bills (i.e. when they are behind on their payments). If the client fails to refinance they can lose their home, so they are basically forced to pay any allowable fee to complete the debt consolidation. This highlights the need for consumers to find a reliable company they can trust, with a good reputation for debt consolidation.

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