Debt Consolidation Information

What is Debt Consolidation?

Debt consolidation is taking out one loan to pay off many other loans. Often, this is done to secure a lower interest rate, to secure a fixed interest rate or for the convenience and simplicity of only having to service on loan.

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves taking out a secured loan against an asset that acts as collateral which is most commonly a house (and in this case a mortgage is secured against the house - also called an equity loan) The collateralization of the loan allows you a much lower interest rate than a loan without it. This is because by creating a collateral loan you are agreeing to allow the forced sale, also called foreclosure, of the asset that is being used to pay back the loan. The risk to the lender is substantially reduced so that the interest rate is offered at a lower rate.

Things to be Aware Of

Sometimes debt consolidation companies can also discount the amount of the loan. For instance when the debtor is in danger of bankruptcy the debt consolidator will buy the loan at a discount. Ensure that you shop around for a consolidator who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy so the decision to consolidate must be weighed carefully.

Debt consolidation is advisable in theory in many circumstances, for instance when you are paying off credit card debt. Credit cards can carry a much larger interest rate that even the unsecured loan from a bank. Debtors with some property such as a home or a car may get a lower rate through a secured loan using that property that they own as collateral against the loan. Thus the total interest and the total cash flow paid towards the debt is also lowered allowing the debt to be paid off much sooner, and incurring less interest to you. In practice, many people are in credit card debt because they spend more than their income. If this becomes a habit that happens continuously, the consolidation of the debt will not benefit them very much because they will just increase their credit card balances again and again.

Due to the theoretical advantages that debt consolidation offers a consumer that has high interest debt balances to pay. Sometimes companies can take advantage of the benefit of refinancing to charge you very high fees in the debt consolidation loan. And sometimes these fees are also near the state maximum for mortgage fees. Additionally, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. In this case if the client does not refinance they may loose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases, the situation is that the client does not have enough time to shop for another lender with lower fees, and may not even be fully aware of what they could be doing. This practice is known as predatory lending. Not all debt consolidation transactions involve predatory lending, but as a consumer it is in your best interest to pay attention to this fact and protect yourself.

Other Important Points to Consider

You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral. If you can't make the payments or if your payments are late you could lose your home.

What's more, the costs of consolidation loans can add up. In addition to interest on the loans, you may have to pay points, with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Debt consolidation lenders may often require an upfront payment of a certain percentage of the total loan amount as part of the process of consolidating debt. Characteristically, this amount is expressed in what are called points and are also sometimes called premiums. Each point is equivalent to one percent of the total loan amount. Therefore, if the consolidation option selected involves paying three points, then the borrower will need to pay three percent of the total loan amount upfront. Most consolidation lenders offer a variety of combinations points and interest rates. Paying more points generally allows you to get a lower interest rate than one would be capable of getting if one paid fewer or no points. Alternately, some lenders will offer to finance parts of the loan themselves, thus creating so called negative points, also called discounts.

The decision of whether or not to pay points upfront, and how many points to pay, should be taken in consideration of the fact that with points, one tends to trade at a higher upfront cost in exchange for a lower monthly premium later on. Points can be paid out of the cash saved by refinancing the loan in the first place. This can be a great idea for someone taking out a loan, and is insured that they can make a larger payment upfront, and then reduce their interest later on. Of course if this is not possible, your best choice would be to find the lowest interest rate possible, and if it is fairly low and you don't think the market will change significantly you can lock the rate in and ensure that you will continue to pay the same amount. It is a good idea to refer to an insurance advisor, or financial or market advisor who can perhaps tell you the most likely trends in the market and how this might effect your loan in the future.

What we have to offer

We offer you the opportunity to get all of the information that you need. It's very simple to just fill out our form, and we will do the rest. You will receive all of the information on refinancing for your local area. You can search for lenders for free and get the best possible quote. The information you submit is secured, private and confidential and you will never receive spam mail from us.

We will help you get the best rates from up to four lenders. There are no obligations, no credit checks, and no social security number required. It takes just one minute to fill out the secure online form, up to four of the best lenders in your area will contact you and you can then choose the best lender at your convenience without the hassle of having to do all the research for each individual lender. We do that work for you.