Debt Consolidation Explained

As more and more consumers struggle with out of control debts, the concept of debt consolidation has become more and more popular, but many of the people talking about debt consolidation do not actually understand all facets of the program. At its heart, debt consolidation is about eliminating the debts that may have accumulated over the course of events large and small. In modern society, credit has become so simplified that individuals become burdened over time (often without ever realizing that it is happening) with financial obligations that they can not see any way to pay back. This is where debt consolidation comes in. Learning the basics of debt consolidation can ease borrowers stress loads and provide for a healthy economic future by eliminating their existing debt balances.

Debt Consolidation Loans And Home Equity:

The basic fundamentals of the debt consolidation program are easy enough to understand. Debts, primarily consumer debts unattached to collateral, are consolidated into a bigger loan (ideally with lower interest payments) which can then be more quickly repaid. Sometimes, this is done by a second mortgage or home equity loan. These typically boast rates far lower than the interest rates offered by credit card companies, but, compare to traditional mortgage rates, they are still well above what seems fair.

Of course, some mortgage lenders may try to tempt borrowers with mortgage rates that are initially very low – even as low as one or two percent – but contain adjustable time bombs that only adjust upwards; that one percent interest rate could be fourteen or sixteen within only a few years. Some predatory loan officers prey upon the egos of the borrowers by insisting that, with such low interest rates, the homeowners will be able to pay off their second mortgage well before the interest rates rise, but it is never a good idea (especially for borrowers that have already demonstrated problems with regard to excessive debt) to assume that course of action will happen. Indeed, given more availability of credit, many homeowners actually wind up getting FURTHER in debt. As they say, debts stretch to meet the capacity allowed.

The home debt consolidation alternative also puts homes at risk. As the economy worsens – caused in part by the sub prime mortgage crisis and the financial malfeasance of lenders who willingly ignored poor equity and shaky credit qualifications – and home property values plummet, too many consumers wind up losing their greatest investment and essential shelter because of some unforeseen emergency that caused them to default on ever rising mortgage payments. It is just too great a risk for most homeowners to take.

Other forms of debt consolidation:

At the same time, something must be done about their ever spiraling debt balances. There are unsecured debt consolidation programs, but they tend to be very hard to enter into and usually maintain interest rates similar to those of the original credit cards. Consumer Credit Counseling companies provide a service similar to debt consolidation, compiling all existing unsecured debts into one larger loan, but they work with the creditors to slightly lower balances and waive past over limit or late fees as well as reduce the overall interest rates. Unfortunately, besides whatever money they charge the debtor, Consumer Credit Counseling companies also ask for contributions for the credit card companies themselves for their services – for obvious reasons, this creates some suspicions about whom they are actually working for and watchdog groups argue that many of these firms are not acting in the best interests of their supposed clients. As another point that many people are not fully aware of, most credit analysts approach a notation of Consumer Credit Counseling involvement upon credit reports as tantamount to bankruptcy, and this can haunt consumers for years after debts have been consolidated.

Debt settlement firms act similarly to Consumer Credit Counseling companies, but they purely act for the debtor’s well-being. In the simplest definition, debt settlement professionals negotiate the severe reduction of funds owed by threatening the credit card companies with the debtor’s potential Chapter 7 bankruptcy. Faced with the possibility that the debtor could declare for bankruptcy protection and theoretically leave the creditors with no legal recourse to reclaim the money owed, most credit card companies will shave off up to sixty percent of the debt balances in exchange for a promised repayment schedule that’s generally between three and five years. This is a debt consolidation that works. The creditors are (relatively) happy, and the debtors can finally be free of their burdens within a (relatively, again) short period of time.

Of course, this method of debt consolidation won’t work for everyone. Credit, income, and the specific companies which hold the debts (US Bank, for example, is notorious for refusing to ever let their debtors walk away from a single penny) are vitally important, and there’s no way for a debtor to truly know whether debt settlement could protect his finances until they sit down and have a free consultation with a debt settlement negotiator who will thoroughly analyze each borrower’s past finances. There are many avenues toward debt consolidation, but, until debtors speak with and listen to a competent debt settlement professional, the debtors can never know which sort of consolidation best helps their specific situation.

Debt consolidation as a way of life:

Almost as importantly, debtors should fully listen to debt consolidation professionals about how to properly budget and learn ways of regulating spending habits so this sort of thing does not happen again. Even after all debts have been eliminated, too many borrowers find themselves back in the exact same morass of bills that cannot be satisfied and creditors ringing their phone off the wall demanding payment. This doesn’t mean that consumers should simply avoid borrowing after debt consolidation. There’s such a thing as good and bad debts, after all, and debt consolidation counselors can help you distinguish between those debts that are good and necessary (such as vehicles and homes and sound investments) and those that inevitably result in financial calamity.

Credit cards are, to be sure, a convenience that allow many consumers the advantages of emergency spending not otherwise possible for families living paycheck to paycheck, and they can be an incredibly valuable asset for self employed individuals essentially investing in their own careers. On the other hand, that very convenience and the irresistible allure of wanting things whenever the urge strikes could be very costly – with the ongoing build up of compound interest, that sweater or video game or trip to Vegas would be paid several times over through the course of the normal borrower’s life. Restricting spending habits, training borrowers to avoid unneeded purchases, and educating families about the importance of a household budget are also parts of a debt consolidation specialist’s job. Simply for the improved credit ratings that credit card usage fosters, the cards cannot be simply ignored, but borrowers should make sure to pay off their cards each month and have the discipline to not allow their wants to overcome their capacity to pay. A good debt consolidation professional does not simply get borrowers out of debt for the time being, they also make sure that their clients never get into debt again.





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