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Debt consolidation is when a third party negotiates
with all of your creditors. Third party will obtain the lowest
monthly obligation needed to satisfy all of your current accounts.
You pay one monthly "lump" sum. This payment is
in turn portioned out to your creditors. The debt consolidation
will in almost all cases be lower by as much as 50%. You must
find the lowest interest rate.
Debt consolidation programs benefit
consumers with an average unsecured debt of
$5,000. Unsecured debt includes credit card debt, medical
debt and service charges. Personal loan debt, signature loans,
charge account debt and certain installment loans also apply.
Debt consolidation reduces overall monthly debt and lowers
interest rates.
A "fixed monthly debt consolidation
payment" is calculated according to the lowest payment
amount accepted by your creditors. The third party you hire
will disperse the amount of your "fixed monthly debt
consolidation payment" to each creditor. Most creditors
will only reduce or stop your interest fees if their minimum
payment is met.
Creditors recognize that people who enter a debt consolidation
program are trying to repay their obligations
in good faith.
Creditors are more willing to extend favorable terms because
of this. The creditor will avoid the significant expense of
turning the account over to a collections firm. Declaring
bankruptcy will also cost the creditor time and money. Creditors
like debt consolidation.
Upon entering a debt consolidation
program you would have to close out
all of your credit cards. This is a benefit
because it will help curb your current spending, eliminating
more debt. Sometimes you will find that you can still own
one or two credit cards if they are "secured". Secured
credit cards do not add debt.
Benefits of a debt consolidation program include
elimination or reduction of past interest and penalty.
Debt consolidation eliminates you from remembering payment
dates for all your debt. You become debt free sooner while
getting rid of collection calls. After full payment, the third
party will negotiate with your creditors for a better credit
status.
One of the biggest disadvantages of a
debt consolidation program is the commissions or "fees"
that are charged. It is not unusual for a debt consolidator
to charge a commission of 10% or more. Large profits can create
unethical debt consolidation loans which are not in the best
financial interest of the debtor.
The second disadvantage is most of those
seeking debt consolidation are already having
trouble making their debt payments. With late payments come
higher interest loans. They will obtain a higher interest
consolidation loan, with little going to the principal. The
monthly payment is reduced, but there is slow progress toward
paying off the debt consolidation loan.
Never obtain a second mortgage on your
home to use as a consolidation loan. Putting all of
your debt on the most
precious asset you have is crazy. You run the risk of losing
your home for the sake of unsecured debt. One might not qualify
for a low interest rate mortgage, and be right back where
they started. Only problem is now the house is on the line.
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