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Why a Personal Loan Won't Work for Debt Consolidation

Jun 5, 2008
Everyone needs to borrow money at some point in their life. It can be as simple as asking a relative for two-fifty for a burger, to be paid back later, to deals with lending institutions involving amounts ranging from tens to millions of dollars.

Money may be needed to purchase a car, refurbish a home, or deal with a medical emergency. As long as the borrower can repay the loan, there's no problem, the borrower gets a need addressed and the lender gets some profit out of risking their funds. It's when the borrower runs into problems repaying that things start to go sour.

Basic Loan Components and Types

There are so many loan packages available today that it can be difficult sometimes to distinguish the best one for a particular need.

All loans come with three basic components: the principal, which is the amount actually borrowed; the interest, which is charged by the lender and is the way by which they make a profit out of the deal; and the miscellaneous fees charged upon setup.

Loans come in two basic varieties: secured and unsecured. Secured loans involve the borrower pledging some sort of security to cover the deal; this is commonly in the form of cars or other belongings, or a home or property. If the borrower defaults on the loan, the lender can then seize the agreed-upon collateral and sell it to try and recover some of its money. These sorts of deals come with low interest rates because some of the risk to the lender is covered by the collateral.

Unsecured loans, on the other hand, don't require collateral, thus making them easier to acquire but at the cost of higher interest rates, to make up for the increased risk.

Personal Loans and Debt Consolidation

Personal loans, which can come in both secured and unsecured forms, are among the most basic of loans. They are used for everything, from covering the purchase of new appliances or that shiny new sedan, to funding vacations and dealing with unforeseen events.

Some people also take out loans to use them in paying off other loans, but that isn't advisable. For one thing, unless the borrower manages to snag a really good loan, the amount borrowed will never be enough to completely pay off a previous loan.

When faced with multiple loans with considerable interest charges, one of the best courses of action could be to use a debt consolidation loan from a reputable firm.

Taking this course of action could probably result in lower monthly payments and reduced charges, as well as address the inability of some debtors to manage their finances.

Not only that, financial education conducted by some of these firms could also lead the borrower not only to debt freedom, but also teach them to live within their means and stop the endless cycle of debt repayment.
About the Author
Zulika van Heerden provides valuable information on her site on how to
live a debt free life.
To read more tips and techniques like the ones in this article go to: http://www.globalproperty.co.za
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