Why Should You Use Debt Consolidation

11 Sep

Why Should You Use Debt Consolidation

Debt Consolidation is the procedure in which all the debt which is owed by you in different aspects such as mortgage debt, education debt, business debt, etc., are clubbed into one debt which is eventually minimized. In the process of Debt Consolidation, all your existing debts are paid out and a single new debt agreement comes into existence. This new debt agreement is also called as the consolidated debt. While opting for Debt Consolidation, most people try to get rid of their unsecured debts. Hence, it is a strategy to help you get rid of your debt.

The debt consolidation loan could be of two types and they are Secured and Unsecured.

Secured Debt Consolidation is the one in which the assets of the person are taken as collateral for the newly incorporated loan. In this the repayment terms are better. Unsecured Debt Consolidation is the one in which the loan is not backed by any of the assets of the person and hence it can have a little heavier repayment conditions.

Can Debt Consolidation eventually reduce your cost?

Generally a debt consolidation loan entails a longer repayment period. It is also able to reduce the cost of debt as the fixed charges pertaining to paying of all the debts individually are now borne only by a single lender and hence much of the cost in fixed charges is saved. It also gives you a way out of paying high interest rates when the interest rates in the economy go down. So high interest unsecured debts such as credit cards, student loans etc., are the ones preferred for consolidation of debt.

Debt Consolidation is generally the last step in making before a person is on the verge of bankruptcy, where-in he tries to consolidate all the debt that he holds. Consolidation helps in lowering the cost of debt and the interest payments.