It is exceptionally easy to get caught up in a vicious cycle of credit that, so often, leads to a position where it appears that there is no way out.
Although less so now, in recent years, credit cards have been particularly easy to obtain even for those with questionable credit ratings. The ease with which new credit can be gained and exploited is why so many people have become too reliant on their cards and end up having a lot of debt. Of course, this predicament does not just apply to credit cards, it also is equally applicable to loans, mortgages and financial instruments such as hire purchase agreements.
However, even when debts appear to have mounted up beyond any semblance of control, there are still a number of solutions open to the over-stretched consumer. One of these is debt consolidation.
In many cases, debt consolidation will improve the immediate severity of debt and buy the debtor some breathing space in clearing their debts. Applying debt consolidation normally involves paying only one lender each month as the whole objective is to take out a loan in order to pay off all the other debts.
How to Obtain Debt Consolidation.
In essence, debt consolidation is the taking out of a single, large loan that is enough to cover ALL of an individual's outstanding debts over such a period that the single monthly repayments become affordable.
These consolidation loans are very often secured against fixed assets such as land, house or even car as this allows the debtor to obtain a loan with lower interest rate using the fixed assets as a form of security pledge.
Inability to Repay the Consolidation Loan.
The temptation with consolidation loans is to re-start spending in an unrestrained manner and build up yet more debts. Anyone considering a consolidation loan should realize that, if they are unable to pay back the loan, the fixed asset used as security will be normally seized by the financial institution from which the loan was taken.
Fear of Adding to Debts.
Many individuals are concerned about debt consolidation loan as they fear adding an extra loan on to an already unmanageable pile of debt. However, this should not be an immediate worry as debt consolidation loans generally subsume all other debt, usually with a lower interest rate and over a longer re-payment period. Moreover, debt consolidation loans will have a fixed, and therefore manageable, monthly re-payment that will have been agreed in advance thus meaning no nasty surprises.
Possible Use of Unsecured Consolidation
Although this article mentioned earlier that most debt consolidation loans will be secured to a fixed asset, this may not always be the case, nor the best way forward. However, instances where specific consolidation loans are unsecured are rare and are really only open to those with small levels of debt that do not warrant the security of a large fixed asset.
Debt Consolidation is NOT Bankruptcy.
Debt consolidation is simply a reorganization of your finances and, in most cases, will not have a negative effect on your credit rating. It is also important to realize that neither is debt consolidation akin to bankruptcy with all of its particularly dire consequences.
As such, if any individual is struggling with their monthly outgoings, debt consolidation may be the way forward but advice should always be sought from an independent financial advisor.
Paul Carcone - I am a Chartered Management Accountant with a military background who is also a freelance Management Consultant based in the United ...
