Many consumers, in the current financial atmosphere, are faced with some extremely difficult decisions when it comes down to managing their monetary affairs effectively. There is an every-increasing number of individuals who find that stretching an already maxed-out budget is becoming much harder to do, and for some, just about impossible. They are undoubtedly asking the inevitable question whether or not debt consolidation is an idea needing further examination.
Debt Consolidation – The Basics
The principle behind debt consolidation is a simple and straightforward concept. It is a process that allows an over-burdened consumer the means to reorganize the total or combined list of credit obligations into a single larger loan, in order to effectively pay off an assortment of other smaller debts. Bear in mind that debt consolidation differs from a debt settlement, which is a method designed to begin negotiating with creditors to reduce the overall debt. Another viable technique that is often considered is called debt management or debt counseling, which entails speaking with a company, service, or legal authority familiar with the ins and outs of budget reorganization, working out repayment plans, acquiring lower interest rates, and so on. Debt consolidation is just as the name implies – combining or consolidating all the debt obligations into one workable or budget-friendly solution, which boils down to a single, and therefore manageable, monthly payment.
Debt Consolidation – Your Options
There are a number of options available within the debt consolidation framework. The overall approach is of course to acquire a loan to encompass the entire debt load, and therefore the single ‘consolidated’ loan. One course of action is a traditional bank loan. However, at this stage, due to the borrower’s current credit standing, the lender from either a standard banking institution or local credit union is far less likely to consider this type of assistance for obvious reasons pertaining to poor credit scores. The same is true for a low interest-rate credit card, which few borrowers with high debt will qualify for, much less incurring another payment to deal with, added to all to their other obligations.
Another option is a home equity line of credit, or a secured loan, which entails borrowing money against the accumulated equity there is in the value of the home. This remedy is rather risky because the lender will consider the home as a form of collateral, and if repayment of the loan becomes a problem, then actually losing the home becomes a definite possibility. The risks involved with borrowing against a 401k retirement plan is just as hazardous, since it is tied to certain rules and repayment requirements, as well as the potential ramifications of losing the security of a retirement nest-egg along with the accrued interest if the job is lost for any reason. Of course, unsecured loans contain risks as well, since they are personally guaranteed by the borrower, and no collateral is required as a back-up strategy for the lender. As with the previously stated risks, in the event a borrower defaults on the loan payments, a creditor will put the account into third party collection status, and the borrower is right back to square one again.
The Benefits and Consequences
On the positive side of things, debt consolidation loans are generally low-interest rate options, and carry the much more manageable aspect for the borrower by only dealing with a single payment to cover a much larger debt. This usually results in a drastically reduced monthly payments, and lowers the total debt repayment amount overall, which can save the borrower a considerable amount of money over time. In addition, and certainly most important is the primary fact that the debt consolidation results in the beginnings of a vital credit reorganization process, which over time will promote a rise in the borrower’s credit rating, as well as a means to achieve better financial responsibility and behavior, along with a far less stressful outlook on one’s personal affairs.
Naturally, there are a few down-sides to the debt consolidation framework as well. Usually these types of loans have much longer repayment cycles, or terms, which tend to result in the borrower having to pay out far more to satisfy the debt than they would have for clearing the original ‘smaller’ debts. By carefully scrutinizing these different benefits and consequences, a potential borrower should come away with a clearer understanding of what is required when considering a debt consolidation loan, and perhaps a greater sense of knowing which option best suits their individual needs.