Debt Consolidation
Debt Consolidation
Debt Consolidation is a credit debt strategy that restructures unsecured debt, such as credit card debt, into secured debt such as a loan from a bank. Your unsecured debt, which can be from multiple creditors, is consolidated into one loan, with one payment from one creditor.
Debt Consolidation vs. Debt Settlement
Debt Settlement is a negotiation with creditors to reduce the amount of money you owe. Debt Consolidation transfers your entire unsecured and credit card debt to a new creditor. This is why it is called Debt Consolidation, and your debt is combined, united, or grouped into a single debt. Under Debt Consolidation, imagine adding up what you owe and paying that total to one creditor. Under Debt Settlement, imagine subtracting an amount from each creditor you owe money to, then paying only that amount.
What Is The Difference Between Secured And Unsecured Debt?
Unsecured and credit card debt does not require collateral to be posted. Secured debt, such as a mortgage loan, requires collateral to be posted. In the event that you can not repay the secured debt, your creditor will have the option to take the collateral you posted to repay your debt. With unsecured debt, there is nothing for the creditor to take. Debt Consolidation typically uses Home Equity loans to consolidate your debt into one
payment. If you are unable to repay this secured debt obligation, you will be at risk of losing your home.
How Much Can You Save?
The amount of unsecured and credit card debt you owe will not be reduced with a Debt Consolidation strategy. The new creditor will have a different set of terms and interest rates than your current creditors but will not reduce the total debt you owe. There may be an opportunity to reduce your interest rate or reduce the amount of your monthly payments; however, the total debt does not change.
Will You End Up Paying More Than What You Currently Owe?
It is possible that you will end up paying more in the long run to resolve a debt consolidation loan than you would by not participating in a debt consolidation program. The reason is that you are now paying on a loan that probably has a fixed term (number of months or years that you will give the creditor money) and an annual percentage rate (interest) that is possibly higher than what you are currently paying.
How long does the program take?
Essentially the program lasts for the life of the loan. Like your car payment loan or your home mortgage loan, Debt consolidation loans have a term, the number of months or years until the loan is repaid (plus interest, of course). If you have a 5-year auto loan, as an example, you must pay money for five years to the lender until you have repaid all of the loans. In this example, it took five years to repay the loan. Debt consolidation loans work the same way.
