Opting For Debt Consolidation? Read This First!

Taking out a loan in order to pay other debts is known as debt consolidation

. This is mainly done to secure a fixed interest rate, a better interest rate, or to be able to service a single loan instead of multiple loans. It also often involves securing a loan against an asset such as a house or a car that serves as security for the loan. However, an alternate option, an unsecured loan from a bank, can, at times, carry a lower interest rate than even credit cards for debt consolidation.

By using property as collateral, individuals with assets such as cars and houses might be able to receive a lower rate through secured loans. In these cases, the loan can be paid off sooner because the total cash flow and the total interest paid is lower, which causes less interest to be incurred. Consolidation companies are known to take advantage of consumers who are refinancing by charging high fees for a debt consolidation loan because of the theoretical advantages that are offered for debt consolidation.

Sometimes the loan might be discounted by the debt consolidation companies. A debt consolidator is allowed to buy the loan at a discount in cases in which the debtor is on the verge of declaring bankruptcy. Prudent debtors will shop around for consolidators who, in turn, pass along some part of the savings to the debtor. Any decision regarding consolidating must be undertaken with the utmost care because consolidation might actually take away the debtors' ability to discharge debts in cases of bankruptcy.

Always be aware that, in this field, there are many unscrupulous companies that are always ready to take advantage of clients who are trying to refinance.

Situations can be so bad at times that, if clients are unable to refinance on time, they even stand very high chances of losing their houses. This situation occurs when a client is forced to pay up-front allowable fees in order to try and clear the debt consolidation loan.

As a client, you are left with no option other than to pay up because you are usually have a very minimal time to shop for another lender who might offer a better rate. This whole concept is known as predatory lending. Luckily, most consolidation transactions do not involve any sort of predatory lending. In the United States of America, consolidated student loans, for example, are guaranteed by the government, unlike the situation in the United Kingdom.

The Department of Education or loan consolidation companies are the entities that purchase and close any existing loans in case of federal student loan consolidation. The ability to consolidate a loan depends on the type of loan that the borrower holds. Student loans typically fluctuate from the current rate of 4.70% to something like 8.25% on the higher side. Students are allowed to consolidate with a private lender once under the current consolidation program. After that, they are expected to reconsolidate with the Department of Education.

It does not matter whether the debtor decides to combine different types of loans, the fact remains that reconsolidation does not change the rates of the loans. Re-financing is the other term that is used to refer to the federal student loan consolidation program. This is not a very accurate term because the loan rates do not change; they are merely locked in.

Loan consolidation for students does not incur any extra fees for the borrowers whatsoever. Private companies, on the other hand, are notorious for separating students from their money to receive the federal government subsidies for consolidation.

by: Allen Jesson

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