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Debt Consolidation Is Not A Debt Reduction Instrument

Jun 26, 2008
Debt consolidation is basically what the term indicates, it is a process wherein your debts from various institutions and of various types are consolidated into one loan instrument. In other words, this is the act of combining all of your debts and loans into one debt or loan.

Same Balance, One Loan
It is obvious, therefore, that the main objective of debt consolidation is to make financial and debt management easier to do. The amount of debt or the total principal balance is generally not reduced upon consolidation. Only the number of debts and loans is reduced.

In other words, after you institute debt consolidation, you will end up having only one debt instead of several. Your balance on this single debt is, simply speaking, all of your various debts combined.

Thus, debt consolidation is not really a debt reduction instrument albeit some debt management professionals typically package debt consolidation with debt reduction moves, i.e. negotiation with the banks and financial institutions to which you owe money.

Through debt consolidation, you take the balances from all the loans to be consolidated then you add them all together to come up with your new principal.

Pay Up to Consolidate
In truth, the banks holding your notes are not going to let your loan papers go to another bank willingly. The only way the banks to which you owe money will let you go is if you pay your loan in full. How then is debt consolidation initiated?

First, you have to talk to a bank. This bank may be one you have already used before, or it may also be an entirely new institution. Talk to the loan officers at the bank and explain that you need to get a loan for debt consolidation purposes.

That is right. You need to apply for a new loan. Of course, if you already have a loan with that bank, it may be possible to request that they extend your credit so that you can transfer your other loans with other banks to the loan you already have with them. In that case, you will only need to transfer other loans to an existing loan and no new loan will have to be procured.

Once the bank agrees, it will release funds which you can use to pay off your existing loans. The bank can also mail the check or do electronic transfers to the other banks and thus pay off your other loans for you. All the funds they have released for your loans payment will be added up and the sum plus service charges if there are any will become your new consolidated loan balance.
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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