Process The bulk of the consumer debt, especially that with a high interest, is repaid by a new loan. Most debt consolidation loans are offered from lending institutions and secured as a second mortgage or home equity line of credit. These require the individual to put up a home as collateral and the loan to be less than the equity available.
Lenders have fixed costs to process payments and repayment can spread out over a larger period. However, such consolidation loans have costs: fees, interest, and "points" where one point equals to one percent of the amount borrowed. In some countries, these loans may provide certain tax advantages - Debt Consolidation Risks. Because they are secured, a lender can attempt to seize property if the borrower goes into default.
This payment will then be disbursed, by these companies, among the various creditors, the consumer is indebted to. Many other countries, alongside United States, also have such professional services for the benefit of consumers, struggling with household debt. Student loan consolidation In the United States, student loans which are part of the Federal Direct Student Loan Program are consolidated somewhat differently from in the UK, as federal student loans are guaranteed by the U.S (What is Debt Consolidation? How Does it Work?).
United States In a federal student loan consolidation, existing loans are purchased by the Department of Education. Upon consolidation, a fixed interest rate is set based on the then-current interest rate. Reconsolidating does not change that rate. If the student combines loans of different types and rates into one new consolidation loan, a weighted average calculation will establish the appropriate rate based on the then-current interest rates of the different loans being consolidated together.
Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government. United Kingdom In the UK student loan entitlements are guaranteed, and are recovered using a means-tested system from the student's future income.
Many students, however, struggle with commercial debt well after their courses have finished. Australia Australia’s student loan system once had 35 years to pay back loans, but it’s currently 15. Those seriously delinquent on student loans face arrest at the border. In Japan, an increasing number of student loans are in arrears.
Some financial experts say that debt consolidation can make it easier to overspend again. Tanner Dodson, co-owner and marketing manager of Ashley Dodson, CPA , in Columbia, Missouri, says that many people take out new loans or credit cards once they have a bit of spare cash from the lower monthly payment that comes along with their debt consolidation loan.
“Without connecting the underlying issue, a debt consolidation loan will not break the cycle of debt,” Dodson adds. “It can actually make it easier to increase your total amount owed since most lenders only care about a debt-to-income ratio rather than the total amount you owe.” How can you determine if debt consolidation is right for you? It helps to understand how the process works, when it makes financial sense and what debt can and cannot be consolidated.
This usually requires working with a lender or debt consolidation service that will negotiate a repayment plan with your creditors. These lenders or services will look at what you owe and how much you can afford to pay each month when crafting your debt consolidation plan. There are several different ways to consolidate your debt, though, and not all follow this exact formula.
Todd Christensen, education manager with Money Fit by DRA, a Boise, Idaho, non-profit debt relief agency, says that credit counseling agencies work to secure better repayment terms for their clients, anything from lower interest rates on existing debt to lower monthly payments or the elimination of late fees. Christensen says that debt consolidation can help consumers overcome their debt problems. What is debt consolidation?.
“It does not make sense for anyone consolidating their debts if they have not addressed the cause of the debt,” Christensen says. “If the debt resulted from overspending or uncontrolled credit card spending, consolidating the debt onto one card or account will, more often than not, lead to a return to overspending on the newly paid-off accounts.” Not all debt can be consolidated.
These are the debts you can consolidate. Examples of unsecured debt that you can consolidate include: Credit card debt Student loans Unsecured personal loans Payday loans Medical bills Cell phone bills Utility bills 0% Interest Balance Transfer One of the simplest ways to consolidate your debt is to transfer the balance from a credit card with a high interest rate to one with a 0% introductory rate.