Debt Consolidation


- Debt consolidation is a form of debt refinancing of all yours liability, credit and all your debts that entails taking out one loan to pay off many others.

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What is Debt Consolidation?

Debt consolidation is a form of debt refinancing of all yours liability, credit and all your debts that entails taking out one loan to pay off many others.

It rolls multiple debts into a single payment. It can easily work if all your debt is not excessive and you have good credit and a plan to keep debt in check and it is also a process which can secure your overall interest rate to the entire debt load and provide the convenience of servicing only one loan.

It rolls high-interest debts, such as credit card bills, liabilities into a single, lower-interest payment. It can reduce your total debt so that you can pay it off faster.

If you are dealing with a huge amount of debt and just want to reorganize multiple bills with different interest rates, payments and due dates, debt consolidation will help you in tackle this on your own.

We can say that debt generally refers to money which is owed by one party generally known as the debtor, to a second party which is known as the creditor.

It is generally the repayments of principal and interest. Interest is the fee which is charged by the creditor to the debtor and generally calculated as a percentage of the principal sum per year known as an interest rate and generally paid by the debtors periodically at intervals, such as monthly. Debt can be secured with collateral or unsecured.

Although there is a variation in debt from country to country and even in regions within country. Consumer debt is primarily made up of home loans, credit card debt and car loans and other such loans.

Household debt can include the consumer debt of the adults in the household plus the mortgage, if applicable. In many countries, especially the United Kingdom, student loans can be also a significant portion of debt but are usually regulated differently than other debt.

How does debt consolidation work?

There are basic two primary method to consolidate all your debt, both of which concentrate your debt payments into one monthly bill:

  • Get a 0% interest, balance-transfer credit card: Transfer all your debts onto the credit card and pay the balance in full during the promotional period.
  • Get a fixed-rate debt consolidation loan: To pay off all your debts use the money from the loan, then pay back the loan in installments over a set term.

Process of Debt Consolidation:

The bulk of the consumer debt or liability especially that with of a high interest which is repaid by a new loan mostly. The lending institutions offered most of the debt consolidation loans and it is secured as a second mortgage or home equity line of credit.

These all require the individual to put up a home as collateral and the loan to be less than the equity available.

However, such consolidation loans have some costs such as fees, interest, and sometimes it comes a point where one point equals to one percent of the amount borrowed. In some countries, these loans may provide certain tax advantages also because they are secured and a lender can attempt to seize property if the borrower goes into default.

United Kingdom

In the UK, all the student loan entitlements are guaranteed, and are recovered using a means-tested system from the student's future income which they are going to earn in future.

Student loans in the UK cannot be included in bankruptcy, and also do not affect a person's credit rating because all the repayments are deducted from salary at source by employers, similar to Income Tax and National Insurance contributions.

When debt consolidation is a good idea?

Success with a consolidation strategy requires the following points:

  • When your total debt doesn’t exceed 50% of your total income.
  • When your credit is good enough to qualify for a 0% credit card or low-interest debt consolidation loan.
  • When your cash flow consistently covers payments toward your debt.
  • When you have a plan to prevent running up debt again.

When debt consolidation is a bad idea?

Debt consolidation is not a silver bullet for debt problems. It doesn’t address excessive spending habits that create debt in the first place and even it’s also not the solution if you’re overwhelmed by debt and have no hope of paying it off even with reduced payments.

If all your debt load is small — you can easily pay it off within six months to a year at your current pace — and you’d save only a negligible amount by consolidating. Try to do-it-yourself debt payoff method, such as the debt snowball or debt avalanche.

If the total of all your debts is more than the half of your income, and the calculator above reveals that debt consolidation is not your best option, you’re better off seeking debt relief than treading water.

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