In the simple terms, it is basically taking out a new loan that is used to pay off credit card and other high interest unsecured debt.Why would you do this??
One of the advantages is that you would have the ease of paying one loan a month instead of paying numerous smaller payments.. This makes it more convenient and less time consuming. It also makes it less likely that you would miss or be late on a payment that could negatively affect your credit score. The real benefit comes from the money that you will save as a consequence. Credit card companies are charging very high interest rates on their customers outstanding balances and cash advances. In many cases its close to 30% or more.
What if you could take all those credit card payments and bundle them up into one loan and pay one-third the interest? The interest rate would also be fixed so you would not be subject to further rate increases and surprises. The savings would be substantial and you would be able to pay the loan faster. You could improve your credit and credit score since you would be less likely to miss or be late on a payment since you would have to remember and pay only one loan. Of course this would only be applicable if you did not take on a large amount of additional debt.
There are three ways to take out a new loan:
1) Home Equity Loan – This is the most favorable technique because mortgage interest are very low currently and the interest would be fixed. This would produce the greatest interest savings and it would be the easiest loan to get since it is collateralized by the home. The proceeds from the home equity loan would be used to retire the unsecured high interest loans which are mostly comprised of credit card debt. You would only have to make a monthly payment for the new home equity loan.
2) Unsecured Loan – If you have good credit, then this type of loan makes sense since you could negotiate a new personal unsecured loan that had at a reduced interest rate than your current credit card rates.
3)Low interest no annual fee credit card – This is the least desiresable one and it involves getting a new zero interest or very low interest credit card with no annual fee and transfer your existing high interest debt to it. This would leave with one payment with a low interest card, but you would still be at the mercy of the credit card company if they decided to increase your interest rate or impose other fees.
There are those rare occurrences were the debt consolidation company can negotiate a loan discount. This occurs in the circumstances were the individual is near bankruptcy and the creditor is willing to recoup part of his investment, than not getting anything at all. However, this type of situation is rare and it resembles a Debt Settlement Program rather than a Debt Consolidation.
In summary:
Debt Consolidation offers several distinct advantages and can be an affective Debt Relief instrument. It helps you organize your monthly payments into one payment Reducing the time and effort need to keep track and pay all your bills. It can produce a significant amount of cost savings by replacing high interest cost debt with low interest bearing debt. This also can result in helping you pay off the debt quicker. Your credit score could benefit by reducing the risk of missed or late payments. So Debt Consolidation clearly has it advantages and makes your life less stressful and gives you greater financial freedom. It is a great method to get your financial house in order. Depending on your situation this method of debt relief is worth taking a look at as one of the alternatives for becoming debt free.
For more information on all the available debt relief programs and useful resourrces please visit our website at www.debtadvicespecialist.com
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