The process of debt consolidation involves applying for a new, single loan product that you can use to pay off a number of less significant financial obligations. When taking out a debt consolidation loan, the applicant will usually get a much better deal on the rate of interest, with an extended loan term that will reduce their overall monthly outgoings.
Debt consolidation occasionally involves reducing a large number of unsecured loans by means of a single unsecured product, but you will typically find that debt consolidation products take the form of second charge loans, which are usually taken out using your home as collateral. As the loan is secured on a property, the risk of lending is greatly reduced which means that the rate of interest offered is much more competitive. In some situations, the lender may even offer the client an additional discount on the loan value.
If you have maxed out your credit cards and you are finding it difficult to meet the repayments then a debt consolidation loan can be an enormous help. Many credit cards are notorious for having excessively high interest charges and the act of taking out a new loan secured on your home or car in order to reduce repayments will enable you to pay off what you owe much more quickly.
If you do not own a property then there are still a number of alternative debt consolidation options available to you that will enable you to manage your original loan commitments more easily. Student loans, credit card debts and other loans can sometimes be combined into an unsecured product although the interest rates will not be as competitive.
Be aware that because of the theoretical advantage that debt consolidation offers a consumer with high interest debt balances, some lenders will take advantage of the benefit of refinancing and charge much higher fees than necessary.
In addition, some companies will knowingly wait for a client to be backed into a corner so that they must refinance in order to consolidate and pay off bills that they are behind on. In certain cases, the situation arises where the client does not have enough time to shop for another lender with lower fees or they may not be fully aware of them.
Most debt consolidation companies operate in an above board manner and are not involved in this type of activity – but it is always an advantage to be aware of these practices.