Debt consolidation basically requires taking out a loan to pay off many other debts.
This is often done to secure a lower interest rate, secure a fixed interest rate or just to get all your outstanding debt rolled into one monthly payment with only one loan to service.
Consolidating debt is taking a number of unsecured loans and/or debts and combing them into another unsecured loan. Most of the time it is actually rolled into a loan which has been secured by an asset that serves as collateral, such as a home, ( a mortgage).
By securing a loan with an asset it gives you an advantage to receive a lower interest rate, but because the loan is secured the owner of the property that is being used for collateral, agrees to allow a forced sale (which is known as foreclosure) of the asset in order to pay back the outstanding debt if the property owner fails to make payments as agreed upon.
Because the loan is secured the risk to the lender is reduced. Which allows for the lender to offer a lower interest rate.
Usually debt consolidation is advised mostly for credit card debt. Credit cards usually carry a much greater interest rate than even an unsecured loan. Taking all the credit card debt that is carrying a much higher interest rate, which usually generates a much higher monthly payment, and rolling them into a loan which is secured by property such as a house or a car, the total interest and payment will be much lower. This will allow you to pay off the debt much quicker, incurring less interest.
One of the biggest mistakes that can be made while consolidating your debt, is if you continue with old habits and incur credit card balances again. You will find yourself deeper in debt, but this time you might not have the ability to make both payments, falling behind on your loan payment and being at risk of losing the property that you have secured your loan with.
Before consolidating your debt with a secured loan, research other ways you might be able to consolidate your unsecured debt, never put your property on the line unless it is absolutely necessary. Research this and make your decision wisely.
Remember there are many other ways to consolidate and/or eliminate debt without having to secure a loan using your property and risk losing it !!!Sometimes, debt consolidation companies can discount the amount of your loan. When the debtor faces any possibility of bankruptcy, a loan consolidator will buy the loan at a discount. But be careful, this type of consolidation can affect your ability to discharge debts in bankruptcy.
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