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Debt Consolidation
What Is Debt Consolidation?
8th May 2007
In efforts to get out of debt I'm sure you would have or will come across the term "debt consolidation". This is an option offered to those who can manage the repayments on a consolidation loan. It is one way of getting out of debt. To understand what debt consolidation is, perhaps let me give you a few definitions of what the word consolidation means.
- InvestorWords - The combining of separate companies, functional areas, or product lines, into a single one. Differs from a merger in that a new entity is created in the consolidation.
- TheFreeDictionary - The merger of two or more commercial interests or corporations.
- Wordreference - the act of combining into an integral whole; "a consolidation of two corporations"; "after their consolidation the two bills were passed unanimously"; "the defendants asked for a consolidation of the actions against them"
Okay, I'm sure you get it now. So consolidation is all about integration. You've pretty much guessed what debt consolidation is then right? Debt consolidation is the replacement of multiple loans with one loan which allows you to pay the consolidation loan off at a lower interest rate and thus a lower monthly payment.
Mostly when you take a consolidation loan you are refinancing so your mortgage is the best way to use a secure loan for your debt consolidation excercise. When you do this then you have the advantage of securing a lower interest rate on your mortgage repayment this allows the convenience of servicing only one loan. A mortgage is secured on a house so the asset here is the house which serves as collateral for the bank. So this allows for you to have a lower interest rate because when you agree to putting your house as the securing asset then the bank know that they can always recover their money by forceful sale of the house and they can recover their money.
Debt consolidation is something that needs to be considered carefully and should be used to service credit card debts as these have much greater interest rates than even unsecured loans from banks. Most people need to do credit card consolidation because with using credit cards, they wind up owing more on the credit card than their income. This is where the living beyond your means comes into play. When at this stage then you are in bad debt and the sooner you get out of it the better.
Debt consolidation is not always the best and if you find yourself in a situation where you want to look at your options, learn about the options available to you or seek the help of a financial advisor.
"Before you can really start setting financial goals, you need to determine where you stand financially."
- David Bach
Comments (8):
Trevor Says: Consolidation is an option most people don't research well because normally when you consider it you're already in so much trouble | 05.8.2007 |
Leon Says: Although a secured loan can be taken for consolidation efforts, like the post put it you can lose your house because you offer it up as collateral. It's still risky | 05.8.2007 |
Carrie Says: It is risky which is why I would say it is better to pay off those debts with savings money and just start saving from scratch thus saving what you would have been otherwise paying for the consolidation loan. Just my opinion | 05.8.2007 |
Matthew Says: I agree sort of. I'd rather use my salary to pay the debts and not tamper with the savings as those are there for rainy days and with your salary you will eventually pay off your debt provided you don't get into more debt that is | 05.8.2007 |
Darryl Says: I also would not recommend touching your savings unless you are really left with no other choice and all else has failed | 05.8.2007 |
Tim Says: It's a catch 22 but when you make a financial decision you must weigh your options and forecast what effect your actions will have on your personal finance for the next 6 months or so | 05.8.2007 |
Johnny Says: If you can, then it's advisable to seek the help of a financial advisor | 05.8.2007 |
Nate Says: In my experience, financial advisors are only as helpful as you determine. If you do your homework and ask the right questions then you'll get more value out of it | 05.8.2007 |
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