Suppose you have a number of high-interest loans in the market. Debt consolidation will take all these loans together and convert them into one single loan with relatively lower rates of interest so that you are in a better position to pay off your actual debt. Generally the debt consolidation agency will negotiate with your creditors to bring down the interest rates. The creditors relent because they want to get back as much as they can without dragging the matter to the court which will involve a lot of hassles.
Debt consolidation loans are generally of two types - Home-equity loans and Personal loans. What is the basic difference between the two? In the former the creditor lends you against a property of yours, in this case your house. So if you default in your payments, the creditor can recover the amount he lent from the value of your house. Since this is a secured a loan the lending institution will allow you lower rates of interest. This is generally between 9% - 12% which is quite attractive.
In case of personal loans there is no such security and the money is lent on the basis of work you do and your earlier financial performance. Since it is an unsecured loan, the rates of interest also go up and are anything between 12% - 15 %.
When would one need debt consolidation?
When there is no other alternative but bankruptcy that is the only time when one should seriously consider about debt consolidation. The best indicators are that you have already started to fail paying your bills, and collection agencies and attorneys are ringing you up for the payments. It would be wise not to wait any longer and go straight for help.
When should one not consider debt consolidation?
If you think and you are confident that you will be able to manage your own debts then don't go for debt consolidation. The temptation generally is that you can get off by paying less interest on your debt. But there are two things that you should be aware of. Your creditor must be convinced that you are not in a position to pay the previously agreed upon rate of interest. And even if they relent, it has been observed that people can often pay more while repaying through debt consolidation services, than if they pay the debt off by themselves.
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