Opting for Debt consolidation? Read This First!

Taking out a smaller loan in order to pay other huge loans is known as debt consolidation. Sometimes it becomes the necessity to take a smaller loan from some lendinding agency to get rid of the larger loans. This is mainly done to secure a fixed interest rate, a better interest rate, or to be able to pay a single loan instead of multiple loans. It also often involves securing a loan against an movable or immovable property such as a house or a car that serves as security for the loan.  However, an alternate option, an unsecured loan from a financer, can, sometimes, carry a lower interest rate than even credit cards for debt consolidation.

By using property as guarantee, individuals with movable property such as cars and houses might be able to receive a lower rate through secured loans. In these cases, the loan can be paid off sooner because the total cash flow and the total interest paid is lower, which causes less interest to be incurred. Consolidation companies are known to take advantage of consumers who are refinancing by charging high processing fee for a debt consolidation loan because of the theoretical advantages that are offered for debt consolidation.

Sometimes the loan might be rebated by the debt consolidation companies.  These companies are allowed to purchase a loan at discount in case a debtor is going to be bankrupt. Prudent debtors will shop around for consolidators who, in turn, pass along some part of the savings to the debtor. Any decision regarding consolidating must be undertaken with the utmost care because consolidation might actually take away the debtors’ ability to get rid of debts in cases of bankruptcy.    

You should beware of dishonest debt consolidating companies as these may deprive you of your assets that you plan to keep with them as security. Situations can be so bad at times that, if debtors are unable to refinance on time, they even face very high chances of losing their houses. Some unscrupulous companies may ask for a hefty amount as up-front fee to clear the debt consolidation loan. So beware of such companies.

Sometimes you have no time to search for the appropriate lender and have no option left but to pay the hefty amount as upfront fee.  This whole concept is known as predatory lending.  Fortunately, most of the debt consolidating companies are not involved in predatory lending. In the United States of America, consolidated student loans, for example, are guaranteed by the government, unlike the situation in the United Kingdom.

The Department of Education or loan consolidation companies are the entities that purchase and close any existing loans in case of federal student loan consolidation. The consolidation of the debt depends on the type of loan that may vary in interest rate. Student loans typically fluctuate from the current rate of 4.70% to something like 8.25% on the higher side. Students are allowed to consolidate with a private lender once under the current consolidation program. They may get it reconsolidated by the Department of Education after that.

A debtor may opt for combining his different types of loans, provided the rate of loan remains the same after reconsolidation. Federal student loan consolidation programs are also sometimes referred as re-financing. This is not a very accurate term because the loan rates do not change; they are merely locked in.

Usually borrowers are not willing to consolidate the student loans as it doesn’t earn them any extra fee. On the other hand, some private loan consolidating companies charge money from the students and also avail of Government subsidies provided for the student loans.

It does not matter whether the debtor decides to combine different types of loans, the fact remains that reconsolidation does not change the rates of the loans. Re-financing is the other term that is used to refer to the federal student loan consolidation program. However, as the rates of the loan remain the same, the term re-financing doesn’t fit accurately here.

Usually borrowers are not willing to consolidate the student loans as it doesn’t earn them any extra fee. Private companies, on the other hand, are notorious for separating students from their money to receive the federal government subsidies for consolidation.

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