Debt Consolidation Loans: A Double Edged Sword |
|
Debt consolidation is a popular term with
multiple meanings. An example is debt consolidation loan, vastly different from debt consolidation from Aegis, and also from credit counseling agencies. It's essential that you decide which kind of debt consolidation you desire before choosing any service. Learning more will help you decide. Aegis does not offer debt consolidation loans but helps a very small group of consumers with substantial debt but no financial hardship. As the collateral for these loans is 200% to 500% of the principal, it is necessary to be the owner of at least one home. Without experiencing financial hardship, a debt consolidation loan at a low interest rate can give substantial savings over time. Even without a major change in the interest rate, the convenience of a single payment every month can justify a debt consolidation loan. The main disadvantage of debt consolidation loans is that they are secured, which means if you default, you may lose your home to creditors. For this reason, the loans are never advised for families with genuine financial problems. Most Aegis clients are faced with financial problems, at times complicated by large debt consolidation loans making a very complex process. Thus a debt consolidation loan rarely solves a debtor's financial situation. Instead it may be compounded. In reality, only if you are financially very secure, with excellent credit and good collateral, can you get a debt consolidation loan at the best rate. Rates Often Not As Advertised Usually, lower restrictions by lenders mean high interest rates, up to 22% or higher. Excellent credit and great collateral may not affect the high interest rate that exceeds or averages your current average interest rate of debt consolidation. Borrowing From Peter To Pay Paul The essence of debt consolidation loans could simply be the transfer of your debt to another lender. The Advantages If you succeed in getting a debt consolidation loan at an overall lower interest rate, you're lucky. However, if in midst of financial problems, it makes a poor option. Being unsecured debt, credit card default does not imply solid penalty. Companies charge minor penalties and interest charges. But debt consolidation loans are secured meaning default could lead to seizure of house or car. The main fact is that though unsecured creditors can take legal action, typically they are more willing to reach a settlement. Understand that signing for a debt consolidation loan will leave you with a single payment to a single creditor instead of smaller ones to several. Though convenient, the one large payment may be more difficult. Even being a dollar short on this single payment is taken to be default. Just falling short doesn't lead to foreclosure or legal action, but late fees and penalties apply. Non-payment by the smallest amount will attract the lender's attention. With additional fees, catching up can be tough and every payment may mean falling further behind. Soon you may find yourself substantially behind, with legal action or foreclosure inevitable. You Have A Choice Refusal to sign for a debt consolidation loan gives you options with creditors. For difficult payments, you can opt for selective payments that are more important. Your mortgage is the highest priority, as a secured debt, followed by a card with a 30% rate and so on. Unsecured creditors like credit card companies and medical facilities are least likely to resort to legal action. But debt consolidation lenders are most likely. It is a secret in the financial industry that not many admit. Solve The Problem, Then Build It Up Again Borrowers of debt consolidation loans are usually allowed to keep credit cards, which leads to the same problem of falling into the trap. Before they realize it, the charges have shot up. Consequently apart from the consolidated loan payment, they also have to make credit card payments. This leads to shortage of funds that they meet with cash advances, which contributes to their debt. Thus the vicious cycle proves never ending until bankruptcy. A debt consolidation loan may prove a solution for some consumers while for others it can lead to financial hell. |
