Concept of Debt Consolidation Loans
The basic idea behind debt consolidation loan is to take out a consolidated loan to clear several other loans. In this case, usually, the consolidated loan is either equivalent to or more than the sum of all other running loans. In case of several loans, the borrower has to pay to several lenders, where in rate of interest is higher and it becomes practically very tough to manage and pay different sums to different lenders on different dates. Practically, the borrower remains under pressure throughout the month. The advantage in case of debt consolidation loan is that the borrower borrows a cumulative amount, normally at a lower rate of interest and he has to pay just one lender, a fixed amount on a particular date, which removes the mental pressure, the borrower used to have throughout the month.
Debt consolidation loans can simply transform a number of unsecured loans, like credit cards, into another unsecured loan. Although most often, debt consolidation loans involve a secured loan against an asset that serves as collateral, which is most commonly a home. Consumers in debt who own a property may get a lower rate through a secured loan using their property as collateral. Then the total interest and the total cash payments towards the debt is lower allowing the debt to be paid off sooner, incurring less interest.
Advantages of Debt Consolidation Loans
One Payment instead of several payments through the month
Pay loan at a lower interest rate
Saves you from harassment by lenders
Saves the borrower from bankruptcy
Offers a fresh start for a healthy financial condition
The most important advantage is that debt consolidation loans save borrowers from extreme mental agony and round the clock pressure.
In this case a mortgage is taken out on the home. Using the home as collateral allows a lower interest rate because by collateralizing, the homeowner agrees to allow foreclosure of the home in order to pay back the loan. Since the risk to the lender is reduced the interest rate offered is lower. Debt consolidation loans are advisable when the borrower is paying credit card debts. Since, credit card debts attract much higher interest rate than even an unsecured loan.
In some cases, debt consolidation lenders can reduce the amount of the loan. When the borrower is in danger of bankruptcy, a debt consolidation loan provider can buy the loan at a discounted rate. A consumer, who is paying multiple loans, can shop around for consolidated loan providers who will pass along the best savings. Debt consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to debt consolidate must be carefully thought out.
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