What is Debt Consolidation

When one is in deep debt and the burden reaches a point of exasperation and tension, it is better to opt for an innovative financial instrument called debt consolidation. Very often the current loan is unstructured and involves high monthly payouts due to increased interest rates. With debt consolidation, the burden of two or more loans is merged into one single entity and that assumes the form of a personal debt. This form of consolidation typically results in a lower interest payment allowing you to save money on a monthly basis. The new structure also enforces discipline and a tight repayment schedule to enable you to settle the debt at the earliest.

You can connect into such a plan through an agency or through a classified consultant. Once you meet up with a qualified debt advisor, you will be able to arrive at a decision as to which is the best option for you. Under the debt consolidation plan, three options varying with the requirements of an individual exist – loan consolidation, loan management and the filing of bankruptcy.

Under the debt or loan management option, the consolidator will take on the burden from you and enter into a separate repayment arrangement with the lender based on their own credit rating. Typically, they already have existing ongoing relationships with these lenders like card companies, other collection agencies etc and are thus in a better position to negotiate terms. You benefit since the interest rates are always on the lower side as opposed to the one you are being levied and this results in significant monthly savings besides having to deal with only one creditor. Management of the debt is thus far simpler and tenable.

You need to be aware though that having entered into such an arrangement, you cannot operate any of your cards barring one for any exigencies. The positive feature is that you will not be troubled by the different creditors and need to deal with only one, making sure that you do not fall back on the repayment schedule agreed upon.

You need to read the fine print of the arrangement and make sure that the new debt tenure is not an extended one, as that will mean that you end up paying far more. Moreover, do not offer your house as collateral. It can be repossessed in the event of any default from your side.

The repayment schedules are normally agreed upon for tenure of 5 – 7 years. Unfortunately, even this schedule is not always maintained and adhered to due to changing economic conditions and bad after sales service.

You can look forward to a commission which would be approximately equal to the first monthly payment under the new plan. There is a component of administration fee that also needs to be paid. This could be a flat charge or a percentage.

To sum up, a loan consolidation plan works well for people struggling with interest rate payment of over 18% or are into the credit card trap.

Mortgage Debt Consolidation

Carrying a debt burden is extremely worrying and cause for tension. Most of us wish to become debt free and are in a constant race to earn enough so that this is achieved. This challenge can be overcome through a financial instrument called the debt consolidation mortgage loan program. You can qualify for such a program if you own a house.

How does this work?

House owners can merge their debt burden by offering their house as collateral against which you get a lump sum amount. You can use this amount to payoff the long pending card balances, car debt, other personal debt. The moment the credit balance runs out, you need to make the monthly contribution as repayment for the loan consolidation amount.

The benefit is that the rate of interest under this arrangement is very low and many people are able to settle the loan and keep to their schedule. Normally, the tenure is spread over a period of six to sixteen years. Due to low interest rate, you tend to save on the monthly payments and depositing these savings back into repayment can enable you to settle the loan quicker.

Under the loan consolidation program, you can opt for either mortgage refinancing or opt for house equity loan. In the former, you can choose for cash-out mortgage refinance where you can refinance your house at far lower interest rates thus effectively reducing your home loan payment or opt for a cash-out refinance plan where you can borrow against the equity of the real estate you own and utilize that amount to settle the high interest debt. You must be aware though that in doing so, you will be increasing your mortgage payment.

Under the house equity loan program, you have two options – a line of credit against your home equity and simple loans given against your home.

In the first option, you can procure cash to merge your loans and settle them. The amount you get is related to the equity of the house and since this falls under the secured category, even people with weaker credit rating can get their loans sanctioned.

The second option involves the disbursement of a block amount that can be used to settle high interest cost personal and card debts. The credit line extended is of a revolving nature and needs to be settled before it spins out of control.

You can thus utilize your real estate equity to good effect by leveraging the benefit of lower interest rates to settle high interest debt and this enables you to ease your debt burden to a great extent.

Small Business Debt Consolidation

Modern cost pressures and inflationary trends have taken their toll on the commercial viability of various businesses and many entrepreneurs are finding it difficult to keep pace with mounting expenses and remain profitable.

This led to close to 2 million businesses filing insolvency in the year 2006. The repercussions are that the credit rating takes a huge beating and customers and even vendors tend to lose trust. Recovering from such a debacle is very difficult if not impossible. The advice therefore is not to file insolvency and look for other avenues to restore credibility. Many financial instruments are available which can mitigate the debt problem. One needs to know about these options and exercise them. More importantly, it is also necessary to learn from the experience to avoid repetition in future.

The finance market does offer innovative small business debt consolidation options tailored for small business entrepreneurs, who help them, overcome crisis and also provides valuable inputs to prevent any recurrence. Relief is offered in the form of consolidating the loans into one where the interest rate is lower and management of the debt through one liability is easier. The payout on a monthly basis is far lower and is not daunting. The various loans that qualify in this category are loans on the card, apprentice loans, etc. Businesses can consider a variety of small business debt consolidation programs which can assist them manage their debt efficiently and not force them to file for bankruptcy.

The crux of the issue is to achieve relief from the high interest rate at the earliest. Two options, such as the secured and unsecured loans are on offer. The former is lent at a lower interest rate due to the collateral that backs the loan as opposed to the latter, which does not have any collateral backing it and hence comes with a higher interest rate component. It is recommended that you place real estate as collateral as it is always has a value you can fall back on in times of emergency.

The other option is to choose a debt relief schedule wherein the burden is consolidated and repaid over a period of time. This ensures that the debt is spread across a tenure and since the monthly payment is a far lesser amount than what you would have otherwise paid, you have surplus funds that can be utilized effectively.

One must recognize that these options are not a total fix it solution to your debt problems. It only provides you some temporary relief and lessens the repayment burden to some extent. Debt that has been accumulated has to be settled one day and there is no escape.

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