Rabu, 03 Februari 2010

Debt Consolidation

Debt Consolidation

Let us today discuss something about Debt Consolidation & How it Works? I am sure that, you MUST have heard about the name “Debt Consolidation” very often if you are living in United States. This is because “Debt Products” are the most commonly marketed products and thus the Debt consolidation services. Today I will explain you in simple words that What is Debt Consolidation & How it Works?

Well, See. Debt Consolidation means taking one low interest loan (usually backed by your home) to repay several high interest loans mainly several credit card debts.

This is the simplest explanation of debt consolidation and everything in this world about debt consolidation services to debt consolidation programs revolves around this single but very fundamental definition.

Explanation of Debt Consolidation -

Most of the Americans are hyper consumers. They take multiple loans to fuel their heavy status life style. They scratch all of their credit cards up to last dollar and finally one day when they wake up, they find themselves into a deep debt up to their eyeballs.

Now, they can’t afford to pay even minimum payment dues on their credit cards and they start defaulting. And thus, the debt grows larger and larger. And now they need debt consolidation services.

Means here, the debt consolidation firm/agent will negotiate with your lenders and help you to convert your unsecured high interest paying loans into a single small payment and low interest rate loan usually backed by your home.

Say for example, if you are a deep debt of $ 40,000 and out of which $ 10,000 is of personal loan of 10% per annum and $ 30,000 is your Credit Card debt having 15% interest annually. And your loan tenure is 3 years than debt consolidation will help you to convert this loan into a 6 years loan having just 8% of interest rate.

Remember, Debt Consolidation programs do 2 things.

01) They increase the Tenure of your loan so you end up paying almost 30-80% low monthly payment

02) They convert your unsecured, high interest paying loans into the secured and asset backed loans usually backed by your home.

Does Debt Consolidation Really Work? -

The Industry insiders say that, Debt Consolidation has not worked for 78% of the people. Than why debt consolidation companies do aggressive marketing? Well, This is because they make money from this.

The reason why Debt Consolidation don’t work for the most of the people is because they haven’t change their bad money spending habits and the financial behaviour. Most of the people who go for Debt Consolidation end up with more debt after a year. Because once you go for debt consolidation, your credit cards will be revert back to their original credit limits. Now, you haven’t change your financial behaviour and bad money spending habits so you will continue scratching your credit cards and thus after a year or so, you will now have 2 debts. One is Home backed Debt Consolidation loan and the other is Credit Card debt.

Now, the only option remains for you is Bankruptcy. So before going for a debt consolidation, I advise you to change your financial behaviour and bad spending habits.

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