Thursday, June 25, 2009

What is debt consolidation?

In those difficult times, a lot of people are finding it difficult to pay back their debts. Probably you have a lot of debts and are finding it difficult to meet those monthly installments. And as you miss those monthly payments, you are having penalties and increases in interest rate. These increase in interest rate and penalties will drain precious dollars and make it more difficult to pay other debts.

Now there are tow types of debts that you need to take into consideration.

1. Secured loans

These loans are backed by an asset such as a house or a piece of land. It may even be backed by a valuable asset. The asset that is backing the loan is called a collateral. Such loans normally have low interest rate as their is little risk that the lender lose his money because if you fail to pay the monthly installment he would seize your house or collateral and sell it to get his money back.

2. Unsecured loans

These loans are not backed by any assets. Hence their is a greater chance that the lender would lose his money. Such loans are thus riskier and have higher interest rate. Personal loans, credit card loans, student loans, car loans, etc are examples of unsecured loans. These types of loans can have the interest on them increase rapidly if you miss one payments. The interest payment will quickly get out of control.


What can you do?

As I have written already on this blog you can start by doing a few things.

1. Stop taking new credit cards. Credit card debt is very bad for the average investor and for everyone in general. Read here and here.

2. Distinguish between good and bad debt by reading this post.

3. Make a budget and slowly try to live within your means. Read this post.

4. Reduce your debt by reading this post on the snow ball method.

If these methods do not work, then you can try debt consolidation.

Debt consolidation

Debt consolidation is a simple process whereby you are going to take all you unsecured and high interest loan and converting them into a single secured and low interest loan. This single loan will be backed by a fixed asset like a house and as a result the loan will be a low interest rate. This is because if you failed to pay this loan the the company can sell your house and get its money back. Hence you are going to pay a single monthly payment. Because the interest rate on this loan is lower you will pay lower interest and as a result you will finish paying the loan faster than if you were paying the different loans separately.

Please read the next part on this topic here.

Have you had a debt consolidation? Were you satisfied with it? Please share your experience with us.

Stay away from credit card?
The snow ball. A better way of reducing your debt.
How to live within your means
Good debt or bad debt. Can you make the difference?
How to consolidate a debt?

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4 comments:

  1. This comment has been removed by a blog administrator.

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  2. dHi,

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  3. Thank you salma. I see that your website offer nice advice to people with loans.

    We have in fact the same aim ie to help investors

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