What is debt consolidation?
If you're looking around to solve your money problems, you won't get far before being bombarded by advice on 'debt consolidation'. But it isn't always clear exactly what's on offer from those two magic words. So here, I've put together some information on the very basics of what debt consolidation is, and how you might be able to use it to reduce your financial difficulties.
The principal - Keep it simple, stupid!
The motto KISS - "keep it simple, stupid", or "keep it short and simple", depending on who you ask - is something that businessmen tend to have drilled into them through MBAs and training courses. But the basic idea applies equally well to individuals, and it explains one part of the benefit of debt consolidation.
You probably owe money to more than one person. You might have a mortgage, you might have debts incurred from your student days, you might have borrowed money from a friend, you might have credit cards, store cards, gradual payments for a piece of furniture.The inventiveness of America's businessmen and financiers, it seems, will never let them cease from dreaming up new ways to make you owe them money.
So, the average American ends up with a tangle of small debts to a dozen different people - a mess. They end up facing problems not just because of the overall amount they owe, but because of the number of debts, and the sheer difficulty of keeping track of them all.
It's not uncommon for somebody to have the money to pay off their debts, but to miss the odd payment just because of the sheer complexity of it all. You have that feeling at that you've forgotten to do something, the bill sits underneath a pile of papers in your back room, you miss the deadline despite it being easy to pay, and suddenly you have a $30 fine on a $5 bill. It happens so easily, and it can cause headaches for anybody. Let's face it, you probably have enough worries looking after your family, your job, your personal interests - you don't want to be spending your time agonising over a dozen bills each month, with a dozen deadlines and a dozen different addresses to send payment to in a dozen different ways.
Debt consolidation is a way to apply the KISS principal ("keep it simple!") to this tangle of obligations. You take out a new laon, which you use to pay off your old loans. Then you only have one set of payments to worry about each month, and the headache of paying different tiny bills every other day vanishes.
Saving money with debt consolidation
So, debt consolidation would often be a great idea ieven if it wasn't going to save yo money, simply because of the increased simplicity debt consolidation can bring to your money management. But that isn't all there is to debt consolidation, not by a long shot.
There are three big ways that you can save money with debt consolidation: by reducing administrative costs, by moving to secured loans, and by moving to more competitive lenders.
Let's start with the 'admin costs' explanation of why debt consolidation sometimes saves money. Remember the tangle of paperwork I described above, with un-consolidated debt? For every administrative hoop you have to jump through, some poor worker at the lender has to do the same. Annoyed at having to send payments for $0.49? Remember that some employee of your lender is having to file that away and make sure the money gets paid. Your lender has to pay that employee, and - you guessed it - they pass that cost on to you. Then add in things like the cost of printing out all the bills, and the postage costs - it might sound trivial, but it adds up - and each little debt you have costs your lender a lot of money.
So by entering into debt consolidation you can replace lots of fiddly little debts with one big one, and demolish the administrative costs of handling your borrowing. That leaves the lender who provided your consolidated loan able to pass on some of the benefits to you, meaning reduced costs.
Second benefit: securing your loans
The second advantage of debt consolidation comes from the fact that some types of debt are cheaper than others. In particular, 'unsecured debt' is more expensive than 'secured debt' (debt which is tied to some property like your house, which you will forfeit if you fail to repay what you owe). If you're willing to tie your debt to your home (accepting that you could be evicted if you fail to keep up your payments), then you can lower your interest payments.
Third benefit: more competitive lenders
Debt consolidation can improve your financial situation by helping you move to lenders who compete on price rather than simplicity. Let's explore that a little.
Many lenders, amazingly enough, don't compete on price. The high street banks rely on their reputation, and on the fact that people want to stay with the same lenders that their parents used. The credit card companies compete on ease of use: they will sell you their cards on the grounds that they are an easy way to pay for your shopping, and they hope you don't pay too much attention to the costs involved once you start borrowing money on them.
With debt consolidation, you take the initiative, you stop lying down and accepting the poor rates that are foisted on you, and you start comparing prices. And once you move into the area where lenders are competing on price, they start to offer you better deals in an attempt to gain your custom. Now that you're an active customer, you can take the best that the market has to offer - which is generally much better than what you'd have got from your old lenders. And there you see yet another reason why debt consolidation, despite its occasional bad press, really can save you money.
What we have to offer
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