Put all your debts in one basket: the advantages of debt consolidation

The economic downturn has had far reaching repercussions, and due to the subsequent lack of available credit, settling debt has become even more problematic than ever before. One method that is used to settle outstanding debt more effectively is debt consolidation.

Debt consolidation involves taking out a loan in order to pay off several other loans or outstanding debts. The reasons debt consolidation is advantageous is that it secures a lower interest rate or fixed rate, and simplifies the debt repayment process through lower monthly repayments.

Debt consolidation often involves taking out a secured loan against collateral, for example a house or mortgage. This collateral is what allows for a lower interest rate, as if the asset owner defaults on debt repayments, it will lead to the foreclosure of the collateral. Therefore, the risk to the debt lender is lessened in this case, so the interest rate is lower than in unsecured circumstances.

Debt consolidation is often useful when paying off credit card debt, as credit cards carry a much higher interest rate. Therefore debt consolidation can balance out the high interest rate of the credit card repayments with the lower interest rates against collateral, thereby accelerating the repayment process. 

Despite the potential financial benefits that debt consolidation offers, it is important to speak to a qualified debt advisor before consolidating any debts. Debt consolidation, as discussed above, is ideal for those who have multiple debts and want to simplify these debts and reduce monthly payments.

However, debt consolidation, although attractive in theory, may not be the best solution for your individual financial situation. This is especially relevant if it is not likely that will be able to repay your debt, even over an extended period. Debt consolidation is also not favourable for debts with a lower annual interest rate or APR (Annual Percentage Rate), as you will pay more interest in the long term.

Therefore, debt consolidation offers a theoretical advantage to consumers with high interest debt. However, the threat of predatory lending exists, and so consumers should be wary of unscrupulous companies when refinancing debt repayments. To clarify, predatory lending is the practice of unfairly placing customers in undesirable financial circumstances through overburdening them with several loans. According to www.investordictionary.com, predatory lending is “…the practice of convincing borrowers to agree to unfair and abusive loan terms.”

According to Ian Wason, the MD of a prominent independent mortgage brokerage, as quoted in an article on www.justmoney.co.za, “Lending criteria and loan to values are fluctuating almost daily. Consumers need to be approaching every possible lender when trying to purchase a new home or consolidate their debt. If they don’t, they could be missing out on saving themselves a fortune.”

In order to go about consolidating your debt, make sure you speak to a qualified lender such as Bassetto Investments. Offering personalized loan services, Bassetto Investments can help to advise you on personal loans that can potentially help to settle your debt more efficiently. For more information about the financial services that Bassetto Investments has to offer visit www.bassettoinvestments.co.za

Source:

Debt Consolidation article. Available at Wikipedia.org [Accessed 7 March 2009]

Debt Consolidation information. Available at debtconsolidation.co.za [Accessed 7 March 2009]

Definition of “Predatory lending”. Available at investordictionary.com [Accessed 8 March 2009]

“Home Loans are like a box of chocolates”. Available at: justmoney.co.za [Accessed 7 March 2009]