Debt Consolidation Relief

debt consolidation relief occurs when an individual takes all of his or her existing credit – which may be from several lenders – and pays it back using a secured loan, usually with a mortgage secured against his or her home. Although there are obvious benefits to debt consolidation, it is not suitable for everyone. Consolidating credit requires an understanding of the nature of the secured debt as well as a change of mindset in terms of the continued use of unsecured credit.

Benefits of Debt Consolidation

Debt consolidation can be good for certain types of people. One of the problems with unsecured debt is that it has traditionally been readily available: in some instances as long as you can produce your social security number you are eligible for a credit card. Because there are a wide variety of lenders it is also possible to obtain a number of credit cards at the same time. This can be very dangerous as it enables people to borrow a large amount of money at high interest rates. Often they are on a fixed paycheck. People begin to get into difficulty when the cost of servicing the debt rises each month, but their salary stays the same.

A credit consolidation loan allows an individual to borrow a large amount of money to pay off all their other existing debts. Because the new loan is secured against an asset the cost of the credit is cheaper, saving the individual money. Monthly repayments are also likely to be considerably lower, which improves the individual’s ‘liquidity’ or cash flow. Debt consolidation can be a relief to people who had previously been struggling to meet monthly repayments. However, if you think you may be likely to get into financial difficulty, it is important to address the issue early on. Defaults on mortgage payments and other credit agreements may make it harder to secure a consolidation loan on terms that are favorable.

Drawbacks of Debt Consolidation

It is often said that borrowing is never a good method for reducing debt. The vast majority of people who take out debt consolidation loans do so with good intentions. Often, however, they keep one or two credit cards ‘just in case.’ Over a period of time, they begin to accumulate debt on the old lines of credit and can find themselves in a worse position than before – not only do they have a significant amount of unsecured debt, but they also have the additional secured debt to service as well.

Another issue that people tend to overlook with debt consolidation is the term of the new loan versus the old debt. If you calculate how much money the new loan will cost you in total over its lifespan it is likely to be far higher than the original debt. It is always advisable to bear in mind the fact that you are not removing the old debt, but simply changing its terms. Although cheaper on a month by month basis, these terms are less favorable because if you don’t make the payments you could lose your home at any time.

Debt consolidation loans are notorious for the high commissions they pay to loan arrangement companies. Usually these fees are tied in to the amount of money that you are borrowing so it follows that they will press to ensure you take as large a loan as possible.

If you are having trouble keeping up with repayments and need advice, contact a bankruptcy attorney today. They will be able to assess your particular circumstances and discuss your options with you in detail.

 

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