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Debt Consolidation Is a Way to Debt-Freedom

Nov 30, 2007
At times, debt does pile up to a very large extent. Some people who are improperly informed about their finances tend to spend more than their actual capacity. This can become a problem with credit cards; since they let you spend away up to your limit. It is not uncommon to meet people who treat their credit cards as sources of free money.

When the bills come, and the income just cannot keep up with the repayment dues and other obligations, the person has the choice of not paying the dues, consequently incurring penalties which may add up and leave him in deeper debt. However, he can seek to get out of this by going the debt consolidation way.

Debt consolidation is the method of taking on another loan to pay of other loans. In a way, you could say that this is taking a debt to pay off another. While this may sound absurd, it does make sense when you learn its mechanics. The transfer of the debt may be done from several unsecured loans into another unsecured loan, but most of the time it is done through a secured loan which is put up against assets which serves as collateral, usually a house.

People generally go in for debt consolidation for three main reasons. It could be to get a lower rate of interest or shift to a fixed rate or simply make it easier to pay off multiple loans.

Some people look at this as a last ditch effort to try and improve their credit scores to some extent. This could be the final attempt before filing for bankruptcy. Debt consolidation companies sometimes discount the amount of the loan, and then buy this loan at a marked down amount. In this regard the debtor may easily search for debt consolidators who may pass along some of the savings from the debt.

But if the debtor does become bankrupt, his right to discharge his debts will be severely affected.

This method of getting rid of debts has proved to be most useful in the case of credit card debts. Since credit cards can carry a significant amount in penalties, and a relatively larger interest rate then most unsecured debts, having several cards, each with its own set of terms for servicing, can become a complex matter altogether.

A debtor can avail of a cheaper loan option if he consolidates all his loans under a secured loan plan and uses his property as collateral. This results in a lower rate than the previous debts, and the total interest and cash flow paid to the consolidated debt is considerably lower. As a result, paying off the loan becomes a whole lot easier and faster.

Because of the advantages of debt consolidation as a means to get rid of high interest debt balances, companies take the opportunity to profit from providing consolidation services by charging high fees, most of the time maximizing regulated limits. The debtor must understand that debt consolidation is a casualty controlling maneuver.

Debt consolidation is not going to cure his chronic overspending. As soon as the debtor starts spending like crazy once again, the benefits accrued by debt consolidation will be wiped away in a jiffy.
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