Debt Consolidation
By
Sybria White on May 17, 2010
Debt consolidation is a process in which one loan is used to pay off many loans. Generally, several loans are combined into one loan. This strategy is advantageous for many reasons. First, it is easy to pay off because it is just one loan instead of several smaller loans. This makes it easier to focus on your debt, intuitively, because everything is located in one place. Another advantage of debt consolidation is that it can
lower your overall interest rate. Your interest rate with several loans may be slightly higher than your interest rate with one consolidated loan. In some circumstances, debt consolidation can even secure a fixed interest rate, an advantage rarely offered with smaller individual loans.
You can consolidate debt for several different types of loans and debt sources such as
student loans, credit card debt, or medical debt. The methods for debt consolidation however vary for each type of debt. Usually debt consolidation is a good idea to eliminate credit card debt simply because credit card debt has notoriously high interest rates. A typical way to consolidate credit card debt is available only to home owners. For home owners, your home can be used as collateral to borrow against your debt. However, there is a danger in using secure debt like your mortgage (tied to an asset) to cover
unsecured debt, like credit card debt (not tied to an asset). If you fail to make payments you could lose your house. Although the payments will be lower, they may have a longer repayment period. Therefore, beware of using secured debt to cover unsecured debt. Another drawback is that the monetary costs of consolidation, such as consolidation fees, may be too great to cover and may outweigh the advantages of this option. So make sure you explore other options, like speaking to your creditors to
lower your payments, because as mentioned above there are several concerns with debt consolidation.
Student loan debt consolidation works a bit differently. Federal Loans can be consolidated by federal Direct Student Loan Program. This program was created in the 1980’s to help students pay for loans under an interest rate determined by the Government. Unfortunately, the recent hazardous condition of the credit market has left this option less accessible. Many lenders (private lender in particular) have
suspended their debt consolidation programs until further notice.
All in all, debt consolidation may not be the answer to your problems. It may just be a not so quick fix. There are both risks and benefits to this strategy but it necessary to weigh your costs and benefits to determine if debt consolidation is the right choice for you. To get to the root of your debt problem consult with
credit counseling organizations (with low fees) and try
debt management plans before turning to consolidation.
Sources:
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
http://loanconsolidation.ed.gov/help/glossary.html#consolidation
http://www.cfnc.org/paying/loan/info_consolidation.jsp