Debt consolidation entails taking out one loan to pay off many others. A loan is a type of Debt. This article focuses exclusively on monetary loans although in practice any material object might be lent This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan. Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets A fixed interest rate loan is a Loan where the Interest rate doesn't fluctuate during the fixed rate period of the loan
Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, most commonly a house. In this case, a mortgage is secured against the house. A mortgage is the pledging of a property to a Lender as a security for a Mortgage loan. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset to pay back the loan. Foreclosure is the legal proceeding in which a mortgagee, or other Lienholder, usually a lender obtains a court ordered termination of a mortgagor The risk to the lender is reduced so the interest rate offered is lower. Risk is a Concept that denotes the precise probability of specific eventualities
Sometimes, debt consolidation companies can discount the amount of the loan. When the debtor is in danger of bankruptcy, the debt consolidator will buy the loan at a discount. In Economics a debtor is simply an entity that owes a Debt to someone else the entity could be an individual a firm a government or an organization Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their Creditors Creditors may file a bankruptcy petition against A prudent debtor can shop around for consolidators who will pass along some of the savings. Consolidation can affect the ability of the debtor to discharge debts in bankruptcy, so the decision to consolidate must be weighed carefully.
Debt consolidation is often advisable in theory when someone is paying credit card debt. Credit card debt is an example of unsecured Consumer debt, accessed through ISO 7810 plastic Credit cards Debt results when a client of a credit card Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. A credit card is part of a system of Payments named after the small Plastic card issued to users of the system Interest is a fee paid on borrowed capital Assets lent include Money, Shares, Consumer goods through Hire purchase, major assets An unsecured loan is a Loan that is not backed by collateral. Debtors with property such as a home or car may get a lower rate through a secured loan using their property as collateral. A secured loan is a Loan in which the borrower pledges some asset (e In lending agreements collateral is a borrower's asset that is Forfeited to the lender if the borrower is insolvent—that is unable to pay back the principal and interest on Then the total interest and the total cash flow paid towards the debt is lower allowing the debt to be paid off sooner, incurring less interest.
Because of the theoretical advantage that debt consolidation offers a consumer that has high interest debt balances, companies can take advantage of that benefit of refinancing to charge very high fees in the debt consolidation loan. Sometimes these fees are near the state maximum for mortgage fees. In addition, some unscrupulous companies will knowingly wait until a client has backed themselves into a corner and must refinance in order to consolidate and pay off bills that they are behind on the payments. Refinancing refers to the replacement of an existing debt obligation with a debt obligation bearing different terms If the client does not refinance they may lose their house, so they are willing to pay any allowable fee to complete the debt consolidation. In some cases the situation is that the client does not have enough time to shop for another lender with lower fees and may not even be fully aware of them. This practice is known as predatory lending. Predatory lending is a Pejorative term used to describe practices of some Lenders. Certainly many, if not most, debt consolidation transactions do not involve predatory lending.
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Student loan consolidation
USA
In the United States, federal student loans are consolidated somewhat differently, as federal student loans are guaranteed by the U. Student loans are loans offered to students to assist in payment of the costs of professional Education. S. government. In a federal student loan consolidation, existing loans are purchased and closed by a loan consolidation company or by the Department of Education (depending on what type of federal student loan the borrower holds). In the United States both the Federal Family Education Loan Program (FFELP and the Federal Direct Student Loan Program (FDLP include consolidation loans that allow students The United States Department of Education (also referred to as ED, for Education Department is a Cabinet -level department of the United States Interest rates for the consolidation are based on that year's student loan rate, which is in turn based on the 91-day Treasury bill rate at the last auction in May of each calendar year. Treasury securities are Government bonds issued by the United States Department of the Treasury through the Bureau of the Public Debt.
Student loan rates can fluctuate from the current low of 4. 70% to a maximum of 8. 25% for federal Stafford loans, 9% for PLUS loans. A Stafford Loan is a Student loan offered to eligible students enrolled in accredited American institutions of Higher education to help finance The current consolidation program allows students to consolidate once with a private lender, and reconsolidate again only with the Department of Education. Upon consolidation, a fixed interest rate is set based on the then-current interest rate. Reconsolidating does not change that rate. If the student combines loans of different types and rates into one new consolidation loan, a weighted average calculation will establish the appropriate rate based on the then-current interest rates of the different loans being consolidated together.
Federal student loan consolidation is often referred to as refinancing, which is incorrect because the loan rates are not changed, merely locked in. Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government.
Student loan consolidation can be beneficial to students' credit rating, but it's important to note that not all federal student loan consolidation companies report their loans to all credit bureaus.
UK
in the UK Student Loan entitlements are guaranteed, and are recovered using a means-tested system from the students future income. Student loans are loans offered to students to assist in payment of the costs of professional Education. Student Loans in the UK can not be included in Bankruptcy, but do not affect a persons credit rating because the repayments are recovered from the students future salary at source by the employer before any income is paid, similar to Income Tax and National Insurance contributions. Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their Creditors Creditors may file a bankruptcy petition against National Insurance (NI is a system of taxes and related Social security benefits in the United Kingdom. Many students however, are struggling with debt well after their courses have finished
The level of personal debt in the UK has also risen astonishingly in recent years:
"Total UK personal debt at the end of February 2008 stood at £1,421bn. Debt is that which is owed usually referencing Assets owed but the term can cover other obligations The growth rate increased to 8. 9% for the previous 12 months which equates to an increase of £111bn. [1]
Concerns
In recent years, reports in the media have raised concerns about the use of consolidation loans. [2] The worry is that many people are tempted to consolidate unsecured debt into secured debt, usually secured against their home. In Finance, unsecured debt refers to any type of Debt or general obligation that is not collateralized by a Lien on specific assets of A secured loan is a Loan in which the borrower pledges some asset (e Although the monthly payments can often be lower, the total amount repaid is often significantly higher due to the long period of the loan. Debt consolidation sometimes only treats the symptoms of debt and does not address the root problem. In some circumstances, snowballing debt may be a better solution. The debt-snowball method of Debt repayment is a form of debt management that is most often applied to repaying Revolving credit &mdash such as Credit cards
There are other alternatives to a debt consolidation loan, where unsecured debt is not "shifted" to secured debt, but is eliminated through a settlement or payment plan. Debt consolidation can be confusing for many people, so it is helpful to learn about all of your options, and sometimes with the help of an advisor.
Debt consolidation vs loans
The multiple options available to consolidate ones debts can be quite confusing, credit counseling programs, debt settlement, debt consolidation loans, bankruptcy are just a few options available today. Trying to find the best option to suit your current financial situation can be a difficult task.
Typically, debt consolidation programs are debt repayment programs. They can consolidate most types of unsecured debts from major credit cards to personal and student loans. You choose the accounts you want to enter into the program when joining. Once enrolled, the company will contact your creditors to negotiate more favorable repayment terms on your accounts and possibly reducing your interest rates and it may even elimination late fees. You will then send that company one lump sum payment monthly which they will disperse to the creditors you enrolled on your account when joining.
Most so called debt consolidation loans are just home equity loans in disguise. They use the equity built up in your current home loan and use it to repay all of your unsecured debts. These types of loan options usually come with heavy application fees and can greatly extend the amount of time it will take you to pay off those debts. These loans also convert all of your current unsecured debts into on secured debt which is now backed by your home. If you fall behind on your payments you could risk losing your property.
See also
References
- ^ Credit Action UK
- ^ "Home or a Loan?", BBC News, May 5, 2006
External links
- Federal Direct Consolidation Loans Information Center of the U.S. Government
- William D. Ford Federal Direct Loan Program
- Federal Trade Commission - Debt Consolidation
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