As more consumers take on consolidation loans to address high levels of indebtedness, banks and lenders continue looking for ways to market their products to new customers. This back-and-forth has created a scenario under which it is easy to borrow without really knowing what you are getting yourself into. Debt consolidation loans are generally a good thing when used properly and in the right way. But it is also possible for consumers to take a loan and never find a way out of debt. This is something smart debt consolidators avoid at all costs.
Debt consolidation loans are typically taken out by using the equity in property as collateral. That collateral protects the bank against loss should the borrower default on the loan. The amount of equity offered largely determines how much money can be borrowed. When a debt consolidation loan is eventually settled, the entire debt it covered is also settled as well. These are the fundamental principles of debt consolidation.
The fundamentals are good starting point for anyone planning to consolidate debt. Below are four more secrets that smart debt consolidators know.
1. Not All Debt Is Bad Debt
There are those consumers who will not take out debt consolidation loans because they believe all debt is bad. Such beliefs cause them to think it better to simply struggle along with their current debt load rather than use consolidation as a way to settle that debt faster. Here's the dirty little secret about debt: it is not all bad.
Some levels of debt are actually good. In fact, without indebtedness, most of us would not be able to own a home. Debt is only inherently bad when it meets certain criteria:
- the amount owed is more than the debtor can realistically expect to pay off;
- the debt is saddled with an excessively high interest rate; and
- the terms of the outstanding indebtedness punish the consumer for early repayment.
2. Interest Rates and Terms Do Matter
The second secret smart debt consolidators know is that terms and rates do matter. Consolidating debts only makes sense when the total amount of money to be repaid is less than would be repaid if things were left alone. It is great to get a loan with a lower interest rate, but if the term is so long that you will end up paying more, borrowing on that loan makes no sense.
3. Debt Consolidation Can Improve Credit Scores
Smart debt consolidators know that a debt consolidation loan can be good for credit scores. When done properly, consolidation reduces the total amount repaid and provides a definite settlement date for the debt in question. This reflects positively on borrowers. As a consolidation loan is gradually paid off, the positive impact of doing so only increases.
4. Debt Consolidation Can Improve the Monthly Budget
Improving one's monthly budget is one of the benefits of consolidating debts into a single loan. Rather than having half-a-dozen different debts at various interest rates to be paid every month, the borrower is left with a single payment that more easily fits in the budget. Even if debt consolidation only allows the borrower to break even, better budget management can provide significant relief to consumers stressed by monthly bills.
Smart debt consolidators know just how awesome consolidation loans can be to better manage debt that might otherwise get out of control. Like any form of credit, consolidation loans have to be used wisely and in accordance with standard principles of budgeting. When that happens, borrowers reap all the benefits of consolidating their debts into a more manageable package.
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