Do you know that having debts especially in large amounts from different creditors bring a lot of stress and problems to a debtor? The debtor will always look for ways to reduce debts to save his or her credibility and properties that serve as collaterals. One approach to reduce debt is debt consolidation. Let’s look at debt consolidation – how does it work? What are the pros and cons?
Debt Consolidation is the term used in finance to describe the approach of getting one loan to pay for many other loans. This can be done in different ways. One is through a personal loan from trusted friends and family members where the interest rates can be negotiable. If the debtor has private properties like houses and vehicles, a financial institution or bank that offers home equity loans and auto equity loans is the option for debt consolidation. The financial institution can offer lower interest rates with the debtor’s car or house risked as collaterals.
Another way to reduce debt is through credit card debt consolidation. If the debtor has a good credit card rating, this may be a better option rather than home or auto equity loans. That is because a credit card does not usually require as collateral, the debtor’s assets can be safer if he or she does not want to risk them. Also, with the good credit card rating of the debtor, there is a great possibility that the credit card company will lend him or her with a lower interest rate.
Benefits of Debt Consolidation
There are advantages to the debt consolidation strategy. First, the debtor will not have to pay separate bills to different persons and institutions each month. Instead, he or she will pay just one person or institution with a lower interest rate. This will even lessen the cost of transportation expenses. The cutting of the multiplying interest charges from other loans will be a great help for the debtor. This will let the debtor save money to be used for even important things like education or food. Also, the debtor can budget the money allotted for the monthly payment of his or her only debt. Most of all, the stress of the debtor will be lessened. The debtor can now walk in public minus all the fears of people running after him or her because of all the debts and growing monthly interest charges.
Disadvantages of Debt Consolidation
But there can always be a disadvantage in every risk. While some people consider debt consolidation as an easy fix to reduce debt, some have testified that it is a no-no in the debts issue. It can depend on the debtor’s personality or the situation. In personal loans, not being able to pay a friend or family member can destroy a good relationship. The risks for private properties that serve as collaterals are very high and they can be lost and never recovered. If a debtor cannot pay a credit card company, his or her rating will be lower and it will be harder to pass a rating requirement again for another loan.
Every bad situation calls for a risk to be made. These are the basic things a debtor must know before considering debt consolidation.