In today's economy, debt consolidation has become very popular. The rate of people opting to consolidate their loans is growing. A consolidated loan, usually from a debt consolidation company but sometimes from a local bank, is used to pay off unsecured debts. It takes multiple debts from creditors and turns it into one debt that is to be paid off to the lending company.
Function
Consolidated loans have long been seen as a viable alternative to paying back individual debts. Consolidated loan companies will work with an individual's credit card or other loan issuers to negotiate manageable payments for that individual. The individual will then send a monthly payment to the debt consolidation company, which will in turn disperse payments to the individual's creditors.
Most people opt for consolidated loans when their monthly debt payments are getting too high to pay back and/or there are too many to keep track of. An individual uses the consolidated loan to get out of debt, in lieu of nonpayment or bankruptcy.
Effects
For many, a consolidated loan is a way to get out of debt without declaring bankruptcy. Most people who use a consolidated loan service are looking to salvage their credit and/or reduce the number of monthly bills they have to pay off.
In most cases, a person who opts for a consolidated loan ends up paying more over a longer period of time than he would if he paid each creditor directly. Many people feel that the added expense is worth the peace of mind. They no longer have to worry about keeping track of all their debts and paying large amounts of money to individual creditors.
Considerations
Although a consolidated loan seems like a viable solution to handling debt, there are several things an individual should consider before taking that path.
Consolidated loans will take unsecured debt and make it a secured debt. Most consolidated loan companies will use the equity on a person's home to pay back debts. If a person cannot make the payments to the consolidated loan company, the company may seize his home as payment.
Advertisements that promote debt consolidation through a loan make it seem as if the solution is only a phone call away. The reality, however, is that the application process to get a consolidated loan can be very lengthy and complicated. This is because most debt consolidation companies realize that their clients are calling them because they are having trouble paying monthly credit card bills. The loan companies want to make sure there is minimal risk of a client defaulting on his loans.
Warning
Debt consolidation companies want their clients to believe that they are on their side. In reality these companies are often supported by creditors. The bottom line is that creditors would rather have some money than no money, and consolidated loan companies can collect payments that might not have otherwise been made on a regular basis to a person's individual creditors. So it is easy to see why creditors would want to work with consolidated loan companies. After all, the loan companies are looking to make money like any other business.
Even though a company may promise that it wants to help eliminate debt, it must not be forgotten that by agreeing to a consolidated loan is the same as applying for a credit card. Payments to a consolidated loan company can affect a person's credit positively or negatively just like a credit card.
Prevention/Solution
Consolidated loans are a last resort for most people. Although they may help you to get out of overwhelming debt, it is always better to not allow yourself to spend more than you can pay back so you never have to consider a consolidated loan.
One of the biggest problems attached to credit cards is that they allow people to spend more than they have and it is easy to get carried away. It is always better to spend modestly and realize you'll have to pay the piper eventually.
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