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Struggling with Unsecured Loan Repayments? Learn How Debt Consolidation Works
- Find the best way to consolidate debt
- What are debt consolidation and its effects
In the times of economic boom the demand for various types of debt products is very high. The economy grows, consumer purchasing power increases and the level of indebtedness of different social classes expands. Low interest rates and easy access to credit stimulates consumers to borrow more than they are actually able to repay. When the economy moves into downward circle, many of the borrowers experience difficulties with maintaining a good credit standing and fail to stick to their financial obligations on different debt products. This is the time when debt consolidation can occur to be the best option to manage the debt exposure.
If I am struggling to manage my debts, then debt consolidation may be one of the solutions for me to consider. Obviously, many of us have never had to deal with thorough debt management before and, thus, have only vague idea about what debt consolidation is, how to consolidate debts and what the best way to consolidate debt is. The good news is that I am not alone and there are many people who only recently started explore debt consolidation and its effects on their general financial standing.
Debt consolidation represents one loan that is used to repay my other outstanding debts. Usually, the best way to consolidate debt is to secure it again any valuable asset I have. This can be my house, car or any other tangible equity. House is most commonly used as collateral for consolidated debt. It means that I arrange a loan from another alternative loan provider who specialises in consolidated debts and provide him with my home as a way of security for the loan. This would give me several immediate benefits such as lower monthly interest payments, possibility to fix my interest rates over large period of time and to improve my credit history. The process of debt consolidation secured on a house is summarised in the graph below.
Graph 1: An Example of Debt Consolidation Secured on a House
There are several ways of how to consolidate my debt. I can go to an agency, which will analyse my indebtedness and credit history providing me with several tailor-made strategies for debt consolidation and act on my behalf negotiating with financial providers terms and conditions of my debt consolidation agreement. Alternatively, I can go directly to the debt consolidation provider and find out directly about debt consolidation, its effects and what best way to consolidate debt is.
The difference between the two is that in case of the agency, I will be required to pay a certain fee for the service. However, the benefit is that I would receive a full advice of how to consolidate my debt, about different options available to me and would get assistance in negotiating the best terms and conditions. The last one is especially important since it is a standard practice of debt consolidation providers to request the highest fee for the provision of the debt. The reason behind is that the financial provider can leverage on my financial constraints and the lack of options.
To summarise, people seek debt consolidation when they are not managing to fulfil the obligations with regards to monthly payments of the variety of their unsecured loans. Debt consolidation allows the full repayment of outstanding loans with one loan usually secured on a house. The effects of debt consolidation can be severe as it puts a house as collateral, which can be lost in case if the borrower is unable to repay interest rates and the loan itself. Many agencies provide solid advice on how to consolidate debts and find the best way to do it.