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Economic Death Spirals and Debt Solutions
Debt consolidation is generally accepted as the most viable solution for debtors who are over their heads with credit card debt. Credit cars notoriously carry high interest rates. To combat this, debtors with viable forms of collateral can borrow against this collateral, securing a second loan to pay off their credit cards. This second loan, secured against say a house, can e paid off sooner as it enjoys a significantly lower interest rate.
As sobering a topic as debt consolidation is, it is far more pleasant topic than bankruptcy. Indeed, debt consolidation is a means of avoiding bankruptcy and remaining financially solvent. The effects of a bankruptcy are designed to be disruptive for years following the dismissal of debts. Securing a new line of credit can be agonizing and ultimately frustrating. Consolidation often entails taking out one loan to address you various debts. This new loan typically enjoys a lower, fixed interest rate and often proves more manageable for families and individuals alike.
You should know that although some consolidation service will grant unsecured loans, most services require the loan be secured against some form of collateral, more often than not, a home or vehicle. The collateralization of the loan provides for a lower interest rate as the debt is secured against a profitable asset. Failing to pay off a collateralized loan often entitles the holder of the loan to take possession of said home or vehicle. In essence, since the risk of losing money is lower, so too, then, is the amount of interest on the loan.
If a debtor is on the brink of bankruptcy, the loaner will often buy the loan at a considerable discount. It would behoove the smart debtor to shop around for the best offers. Though never mentioned, a consolidation agreement can seriously affect a debtor's chances of having his or her debts dismissed by a bankruptcy judge. For this reason alone, it would behoove the potential debtor to think twice before jumping on the consolidation bandwagon.
To compensate for ridiculously low interest rates, unscrupulous consolidation companies move to charge exorbitant processing fees. Often these fees are close to the maximum allowed by state legislatures. Often, they are not directly disclosed. Some companies realize all too well that a client does not have the time he or she needs to shop his or her debt around. In these cases, the consolidation company can charge any ridiculous fee it wants, knowing that the client in backed into a corner. It should be noted this form of last minute lending is also known as predatory lending.
About the Author The most effective debt solutions often require little more than being aware. Know the ramifications of any credit offer that comes you way and consolidate the debt you already have.
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