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Debt Consolidation

What is debt consolidation?
Debt consolidation simply refers to taking another loan to pay up for the first loan. Debt consolidation is often done to get a loan which has lower interest rates to pay off the previous loan. Debt consolidation can be simply from a variety of unsecured loans into another unsecured loan but many times it may involve a secured loan against an asset that serves as collateral like a house or other commercial property which again depends on the conditions of the loan. In the UK a collateral loan has a lower interest rate than a non collateral loan. This is because the house owner or property owner allows the sale of the asset in case the loan is not paid on time. Hence the risk of the lender is lowered so the interest rate on the loan is lowered.

More on debt consolidation
Sometimes the debt consolidation companies can lower the amount of the loan. In case the debtor is in danger of not being able to pay the loan in the future, the debt consolidator will be ready to buy the loan at a discount. Hence a debtor should look around for those consolidators who will pass on some of the savings. The decision of consolidation should be done very carefully as it can severely affect the ability of the debtor to make payments in the case of bankruptcy.

Debt consolidation is one of the best solutions in case you want to pay off your credit card debt. Credit cards in the UK carry more interest rate than any kind of loan, whether it is secured or not secured. However debtors who have property like a house or a car may get the loan at lower interest rates using their property as collateral. Hence the total interest along with the cash to be paid as debt is lower as the debt is paid of earlier, leading to lesser interest rates. Many people make it a habit of shopping through their credit cards and hence end up buying more than they can afford. If this habit of theirs continues then the consolidation will not work for them because their shopping will increase the credit card balance all over again.

Benefits to companies
Since debt consolidation offers a benefit to customers, the companies can take advantage of the refinancing options and then take advantage of that benefit to charge very high rates on their debt consolidation loans. There are many companies who wait for customers who are so much in debt and debt consolidation is the only choice. Hence the customer has no other solution but to refinance to pay off his previous bills. The companies then take up this opportunity to lend the loan to the customers. In some cases the customer does not have enough time to look out for another lender with lower fees and hence he may not be fully aware of these lenders. This practice in general is known as predatory lending.
 
   



 

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