Understanding Debt Consolidation

by Legal Author on August 5, 2012

Debt has become an inevitable part of modern life. For most individuals, a significant amount of earned income is dedicated to repayment of loans in an effort to get debt-free as soon as possible. Many people are more than willing to take a hit on their quality of life in order to ensure that all their debts are wiped clean. However, despite people’s best efforts, debt can be a very difficult problem to tackle. Even if debt does not accumulate, high interest rates tend to ensure that debt levels remain high and that every monthly payment takes away only a small chip off the massive block of debt. Thankfully, arrangements can be made that allow people to combat their debt problems and offer them a golden opportunity to get debt-free. Debt consolidation is one of those glorious methods.

What is debt consolidation?

It would be prudent to declare right away that ‘debt consolidation’ and ‘debt settlement’ are not the same thing. Unlike debt settlement, debt consolidation does not cause the overall amount of debt to reduce; an individual is still responsible for the overall amount owed. Debt consolidation is a process by which all the different loans accrued by an individual are merged into a single loan. People may wonder what the benefits of debt consolidation are over debt settlement if it cannot help lower the overall amount owed. The key reason that people opt for consolidation over settlement is ‘credit rating’. Debt settlement may lower the overall amount of debt, but it can play havoc with an individual’s credit rating, even after the debt has been paid. By contrast, there is no such hassle with debt consolidation and any negative impact on credit rating is very minimal, if at all.

The benefits of debt consolidation

Debt consolidation has two main advantages:

1) The convenience of having to make only a single monthly payment

2) Lower interest rates

Borrowers find the opportunity to pay a much lower interest rate than their existing loans very tempting. Quite often, interest rates can be exorbitantly high, especially those charged by credit card companies. Debt consolidators average out the interest rates on all the loans and offer a new interest rate that is substantially lower, especially when compared to the highest ones. As far as convenience is concerned, the ability to cover all repayment obligations via a single transaction can be invaluable. Besides the matter of convenience, single monthly payments can really help a household manage it budgeting. Opting for debt consolidation allows an individual to gain access to financial experts who can offer debt management tips and appropriate credit counseling.

Long-term advantages

The best part about debt consolidation and lower interest rates allows an individual to get debt free much faster. The longer a person is under the burden of debt, the more likely it is to affect their credit rating. Getting debt free quickly allows an individual to strengthen and build up their credit, while increasing the amount of disposable income they have access to. Making only one monthly payment almost eliminates any chance of being charged late fees. Even if a monthly payment is missed, the charges are much less severe than if the borrower had stuck with the higher interest rates. Consolidating debt allows an individual to deal with only one lender and eliminates the hassles of collection calls.

It would be wrong to assume that debt consolidation is strictly for those in dire financial situations. Most households are paying off multiple loans simultaneously and debt consolidation seeks to make debt repayment less strenuous. Consulting a debt consolidation expert is often the wisest decision that a borrower can make.

Lauren Devaney is the author of this post and a well-known blogger for her advice on debt management. Through her site http://www.paydayloansuk.org.uk/ she likes to offer help to those looking for some cash relief.

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