Debt consolidation is a way of debt repayment in which several debt payments are combined into a single payment. The purpose is to simplify your monthly obligations. Usually a third party is involved in this process that negotiates with the creditors. Process starts by enrolling into some debt consolidation company and select your loans that you wish to consolidate. The company then negotiates with the lenders on your behalf and tries to settle down interest rates and monthly payments at some comfortable level. Sometimes late fees are also adjusted and you have to pay once a month to the company and the rest is their business. They split it up against all your accounts that you enrolled.
There are many ways to consolidate loans. Some companies offer free loan consolidation services. They can also arrange a debt consolidation loan at discount rate if there is a risk of bankruptcy. Debt consolidation should be opted to pay off credit card debts because the interest rate on credit cards is quite high, even more than unsecured loans. Your unsecured debt is usually onverted into mortagage.
Some loan consolidation companies combine several unsecured loans into a single secured debt backed by some asset. The asset is said to be collateral. The advantage would be that, it will lower the interest rate because the risk of the creditor is decreased. But the downside is that the lenders can go for the forced sale of your asset. If you can not pay the loan you have to loose your property.
Debt consolidation credit counseling is another available option. They are meant to analyze the financial position of the debtor and on the basis of their financial situation and come up with an optimal debt management plan according to their goals and requirements. Another advantage of credit counseling is that it makes you knowlegable about the pros and cons of different financial programs.
Government also offers loan consolidation services to students in America and in several European countries.Loans are purchased and then closed by a loan consolidation company working under US department of education.There are many private companies also that offer their services to students for loan consolidation. But they charge extra fee to earn their business however government provides services without charging money. Interest rate for students is fixed per year and loan consolidation is provided against that rate. Interest rate usually ranges between 4% to 9%.
Concerns are now shown against loan consolidation programs because they are failed to address the root cause. Loan consolidation programs settle their terms with creditors but the debtor isn’t benefited that much as he has to pay for the longer periods. Therefore be very care full while taking a decision of debt consolidation.