Debt Consolidation

Debt consolidation: what to consider before making a decision

Debt consolidation is a form of debt refinancing, which involves obtaining one loan to repay many other ones. This usually applies to individuals who are faced with the problem of consumer and personal debts, but sometimes it can also relate to a country’s fiscal approach to consolidating corporate debt or public debt. The consolidation process can provide a lower overall interest rate for the entire debt burden and provide the convenience of servicing only one loan or debt.

When it comes to consolidation of a personal debt, people may get lost and lose their ability to make correct decisions. This article will help those who have faced the problem of accumulating different debts and the need to restrict them.

Description of debt consolidation as a matter

Debt is usually understood as money owed by one side (debtor) to the other side (creditor, lender). As a rule, principal and interest are payable. Interest is the fee charged by the creditor to the debtor, which is usually calculated as a percentage of the principal amount per year, known as the interest rate, and is usually paid periodically at intervals, such as monthly. Debt may be secured or unsecured, depending on the type of loan.

Although there are differences in different countries and even in regions within a country, consumer debt mainly consists of housing loans, credit card debt and car loans. Household debt is the consumer debt of adult family members plus a mortgage, if applicable. In many countries, especially the United Kingdom and the USA, student loans can make up a significant part of the debt, but they are usually regulateddifferently than other debts. Total debt can reach a level at which the debtor faces bankruptcy, insolvency or other emergency financial situation. Options available to overly burdened debtors include credit counseling and personal bankruptcy.

Other consumer options include:

  • debt settlement, when the debt of an individual is agreed with creditors with a lower interest rate or principal to reduce the total burden;
  • debt relief when part or all of individual debt is forgiven;
  • debt consolidation, when an individual can pay off current debts by taking a new loan.

Sometimes a solution may include several of the options proposed above.

What does debt consolidation process look like?

The bulk of consumer debt, especially with a high interest rate, is repaid with a new loan. Most loans for debt consolidation are offered by credit institutions and are secured by a second mortgage on the house. It is required that a person put up a house as collateral, and the loan was less than the available capital.

An overall lower interest rate is an advantage that offers consumers a debt consolidation loan. Lenders have fixed costs for processing payments, and repayment may extend over a longer period. However, such consolidation loans have their costs: commissions, interest and “points”, where one point is equal to one percent of the borrowed amount. In some countries, these loans may provide certain tax advantages. Since they are secured, the lender may try to seize the property if the borrower defaults.

Personal loans are another form of debt consolidation loan. An individual can give a debtor a personal loan that will cover the current debt and create a new one on his own terms. These loans, often unsecured, are based on personal relationships and not on collateral.

There are certain companies and private law firms in the UK that are considered debt relief companies and / or debt consolidation companies. They provide professional debt consolidation services. The consumer can turn to them for help on debts and make only one monthly payment. This payment will then be paid by these companies to various creditors to whom the consumer owes.

That seems to be a good decision for those, who need to solve their problems with debts payment. Though, we understand that a new debt brings new interest and a borrower still will need to repay all money. Otherwise, the property will be seized.

In order not to get in such a situation, we recommend to pay attention to raising financial literacy among the population of Great Britain. Borrow money smartly!