Debt Consolidation Loans

The Issues of Debt Consolidation Loans

Purpose

Debt consolidation is very popular and is one of the best financial ideas lately. The idea behind it is dual. It is very convenient as it is much easier to pay one loan (although one large one) than keep track of all the smaller loans. You have to know all the different payment times, the amounts and if you want to calculate forward you will have to know all the maturities, interests, amounts, etc. Consolidation loans do away with all this and sort of aggregate your loans and you only have to think of one big loan.

The other purpose is to make loans cheaper. A typical example is a credit card loan. Total interest may soar up to 30-40% and consolidating it will give you a lower interest rate so even if you are unable to pay large sums on every due date you will be better off. This works in most cases because of economical mechanisms. The bank's cost for giving you a small loan is very nearly the same as if it gives you a big sum. Therefore it's better for the bank to give you a big loan because then it has a lot more money to use for it's own purposes. It's a great way for the financial organizations to gain a piece of a new market because they collect all the small little debts and aggregate them under their own flag.

Problems

The problem with consolidation loans is that they are almost always secure debts, as opposed to credit card debts which are unsecured. This means that to change all your small debts into a cheaper big one you will have to secure an asset, such as your house. This has been the cause of growing concern as many people are tempted to take the risk and in the end can't pay. This means that upon insolvency they may take your house or car as collateral! So debt consolidation is not a magic show.  If you are in debt because you continuously spend more than your income don't expect to be pulled out of the khaki. Don't forget that if you can't pay you consolidation debt then you are in a way worse situation than with the credit card debt.This said, if you are in a safe financial state consolidation loans will make your life easier, for companies it may make life cheaper and more profitable too.

Risks

There are also risk to consider other than your own. Banks may charge even 10% commission per each installment paid by them! They may also give you worse interest rates than you think if you have a dented credit report. For banks interest is a way to secure risks as much as they can. Of they consider you to be a liability they will give you high interest rates. Some banks have also been known to pay late to the original creditors, and this just makes matters worse! If you go with prestigious banks there should be no problem, but be weary of smaller institutions. Debt Consolidation loans can be a breath of fresh air, but make sure that you know the inns and outs of the deals you get before accepting an offer.