Benefits And Disadvantages Of Debt Consolidation

Debt consolidation is defined as any debt solution that enables a person to clear multiple debts with just one monthly payment

. This includes consolidation loans, but not all the debt solutions involve borrowing more money. It can also be defined as a debt reduction system that allows consumer to combine their unsecured outgoings into one payment. Instead of sending payments to a number of banks, the individual has to make just one payment to the lender and that company will disperse the funds for you.

This System is really useful to consumers, because lenders generally negotiate a reduced interest rate, a lower monthly payment and as a result eliminate late fee and set a limit on the debt to be paid off completely. This might help the borrower save a large sum of money in the long run. But it can also be a bad idea because it will lead to higher interest costs throughout your life time. Hence there are risks too.

Secured loans- It is defined as a loan in which the borrower pledges some asset such as property or land, so the asset becomes a secured debt for to the loan provider.

Unsecured loan-This type of loan is not connected to any property and there might be a chance that creditor would satisfy the debt against the borrower rather than just the borrower's collateral.

Such companies that consider unsecured loans are departmental store and credit card companies. Whereas the mortgage loans and car loans are subjected to securing the debt against the assets.

One of the advantages of consolidating your debt is that you would only have one monthly payment to make to the lender. By consolidating your debts, you are replacing several monthly payments into. It does make sense to reduce your monthly outgoings into one simple, manageable payment. Debt Management is a form of consolidation which is designed to reduce your monthly outgoings to an affordable level if you are facing difficulty in making repayments. In that case this type of loan will really help to pay off your multiple existing debts, which you will repay in single monthly payment.

One of the disadvantages of the above is that it affects your credit history, so if you are rescheduling your debt repayment arrangements through a debt management plan because you were unable to keep up with the original agreements, it will be shown on your credit report. It will make borrowing more money somewhat difficult. Plus once your monthly repayments are reduced it is obvious that you are going to repay your debts for a longer duration and hence you will pay more overall.

It can be concluded that consolidating all your debt depends on your personal circumstances, hence before making any decisions it will be advisable if you speak with a financial advisor, who can help you handle your finances better.

by: Lance Thorington

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