The basis of debt consolidation is that you are taking out one big loan to pay of many other smaller loans. This can help make things easier in that you may secure a low interest rate, fixed rate and it is easier to manage one loan rather than many. A debt consolidation can come in the form of a unsecured loan gobbling up many other unsecured loans but typically it is a secured loan against collateral from an asset such as a house. This can involve some risk if the value of that asset drops. The collateral from a loan allows a lower interest rate because without it a foreclosure would result to pay off the loan. When the risk for a lender is reduced, so is the borrowers interest rate. The same principle applies to credit worthiness in relation to a credit score.
Debt consolidation companies will often discount the amount of a loan. This happens when a debtor is in danger is in danger of bankruptcy the consolidator will buy the loan at a discount. To use a real estate analogy, it’s the same as when a home is sold at reduced cost through a short sale rather than foreclosure. Consolidators may offer different deals so if you are a debtor you should do your research and the decision to consolidate should be handled with care.
Credit cards can bring a big interest rates compared to an unsecured loan from a bank. This is why people facing credit card debt will find it’s their best option.
Using property as collateral can greatly reduce interest rates but each situation is unique and this option may not always be best.
It is a shark hungry business sometimes and companies will wait until a client has backed themselves into a spot where they must refinance in order to pay off bills. When a client does not have time to shop for another lender for lower fees that they may be unaware of, and a lender waits for these opportunities, this is called predatory lending. This is not typical for most lenders especially given certain regulations that make it more difficult but it’s still possible and still exists. This is why it’s important do do your research.
