Debt Consolidation

Debt consolidation means integrating all your sundry debts into one debt to facilitate the process of repayment. Most of these debts include multiple credit card bills, medical bills, grocery bills or store cards, overdrafts and bank loans, hire purchase agreements, mail order catalogue debts and other utility payments. As most of the above are unsecured debts, they attract a higher rate of interest.

Debt consolidation loan is often given against collateral, which is generally an asset such as home or some other property of the borrower. Given the fact that the loan is secured, you can get it at a lower rate of interest and more lenient terms and conditions. This is because in case you default on your payment, the lender can sell off your property to get back his money. More over, if you have a good credit history, you can really get the loan at very attractive terms.
While the repayment term of the unsecured loan may be a maximum of seven years, it can be anywhere from five to twenty five years or even more in some cases for a secured loan such as debt consolidation loan. The advantage of spreading your loan over a long period is that you have to pay smaller monthly instalments. On the other hand, unsecured loans usually have larger instalments and shorter repayment terms.

There is no doubt that the overall interest on the debt consolidation loan works out to be higher at the end of the repayment term, but the smaller monthly instalments can make your life easier. Smaller monthly instalments combined with lower rate of interest can increase your cash flow.

In come cases, the borrower can, subject to certain conditions in the debt consolidation loan agreement, make the payment earlier than the stipulated loan term and be free from the debt altogether.

With debt consolidation you just have to deal with one creditor instead of many lenders. It is always easier to build a rapport with one person than multiple people. This is very important in case you are not able to pay your instalment in time. You can talk to the creditor and convince him to grant you a waiver.

Then again, a debt consolidation loan is a secured loan and as already mentioned you can get it at a comparatively lower rate of interest. Instead of paying variable rates of interest on multiple loans, you pay one small rate of interest and thus save money which you can use for paying off your debt early or for other purposes.