Debt consolidation is more commonly known as debt consolidation loans. It is an approach to dealing with debt in which all outstanding debts are financed using one loan. Debt consolidation usually refers to the act of arranging to repay debts in lump sum payments.
Debt consolidation can be done in two different ways. One way is called debt management, and the other is called debt consolidation through settlement or refinance. Debt management is the method where a third party, generally a debt management company, will negotiate with creditors on behalf of the debtor and get significant reductions in interest rates and payment penalties. They also manage to reduce the outstanding amounts of debts and agree on a repayment plan with the creditors. The debtor then pays the quantity consolidated as a single monthly payment to the debt consolidation company, which then pays the lender.
On the other hand, debt consolidation through settlement or refinance is the process by which you negotiate with your creditors yourself and arrange for lower monthly payments and extended payment dates. This does not mean you agree to set up an IVA. You will negotiate to have any collection activity stopped and also to eliminate any late payment or penalty charges. This will enable you to get on with repaying your creditors in a timely manner. However you will have to bear in mind that creditors are not always willing to settle due to the associated risks involved.
When you think of debt consolidation, you may associate it with getting out of credit card debt. But that is not the only option available. It is possible to consolidate the outstanding bills such as mortgage, credit cards, store cards and personal loans into just one bill. This means that your monthly payment will be lower and you will not be accumulating extra interest charges on your outstanding bills.
The advantage of taking a debt consolidation loan is that you will be able to get rid of all your outstanding bills including those that you currently owe. Then it will make sense to concentrate on the amount you have to repay each month and the interest rate charged on that. If you owe a large amount of money on credit cards, it is sensible to get rid of those as well. Consolidating your credit cards will enable you to get rid of the interest rate attached to them and you may just find that the total amount owed is lower.
There are several advantages and disadvantages to debt consolidation. For starters, if you have a very high monthly repayment, debt consolidation will not help you reduce the amount you have to pay every month. And this means that you will find yourself with even more financial problems. On the other hand, when you take out a consolidation loan, you will be paying the same monthly amount every month irrespective of the amount you owe. So in effect, it works like a snowball payment plan.
If you do not consolidate your bills and debts, you will find it increasingly difficult to keep track of your finances. You will end up spending more money than you make. This will lead to numerous financial problems because you will be paying more for your existing bills than for the new ones you are taking on. Another disadvantage to debt consolidation is that if you are planning to take out another one, it will be more difficult to arrange for the payments. That is because taking out a new credit card is not as easy as paying the old one off.
Debt consolidation loans are also easier to secure compared to personal loans. This is because they come with collateral or security. This implies that you can put your property at risk if you fail to repay the consolidation loan. You may not lose your house if you are not able to meet the monthly payments. However, you will lose whatever the security is as it will be taken over if you are unable to make timely payments.