Debt Issues

Debt Consolidation / Loans

Debt Consolidation / Loans

There is debt consolidation and there is a debt consolidation loan. They are similar but also a little different. The terms may be used somewhat interchangeably. But basically debt consolidation is the bringing together all of your debts (the ones that qualify anyways) and putting them into one bill to pay off in what is usually monthly installments. The benefits are that you are way less likely to forget that particular payment since it is only one to remember. Also, combining them makes budgeting easier and you can reduce interest rates in some of the higher interest bills with certain programs.

A debt consolidation loan is essentially a bank or financial institution lending your money in order to then go and pay off all of your bills yourself but then you owing just the bank money in what basically becomes a bank loan. If you are able to provide the financial institution collateral you will obtain a secured loan and thus receive a better rate of interest due to the risk associated with it now is very low since in the worst case, the financial institution can re-possess your collateral and put it up for auction in order to repay what you owe it. An unsecured loan is one where there essentially is no collateral and as such, your interest rates will most definitely be higher due to perceived risk of default.

A form of collateral that many people choose to use is if they own a house. It is an excellent form of security that banks/ financial institutions love. A bank will have no problem lending out $20,000 for example on a house worth $200,000. It is always a win – win situation for them. They will earn interest on the money they loan out to you and if you default and do not pay it back then they get to keep your house. If this kind of loan interests you, go and talk to your bank or where you have your mortgage or where you deal with. Also I should point out that obviously the bank will not put itself into a situation where it could lose money (well not usually and lets not get started on the sub-prime disaster of a few years ago) If your home is valued at $200,000 on the market but you owe $180,000 still on your mortgage, don’t assume the bank will lend you the remaining $20,000. Remember they will only loan what they feel is a safe amount against its value after what you still owe on it.

A financial institution will also want to insure to the best of their abilities to account for possible real estate market down swings and any other issues to insure that in the worst case scenario they would be able to sell it quickly. Banks do not want to be caught up in the real estate market or any other selling of collateral. They simply want their money back asap if someone cannot make payments. This does not mean that they will simply repossess whatever security you have put up a day after you where to miss a payment. They would go through a system of most likely several missed payments and contact you several times etc. To be sure always read and discuss any of this information with your financial institution.

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