More and more people are experiencing financial problems: overwhelming debt, inability to make monthly payments, etc. Many of these people are wondering what debt consolidation is and whether the process is a good idea. The first place to start is by familiarizing yourself with the process.
What is “debt consolidation”?
First, debt consolidation is a loan from a bank or financial institution that is used to pay off debts in one payment. After consolidating a person’s debts, the individual will have one monthly payment to make – that’s it. Doing this could prevent you from losing your home and car.
Not all debts can be included in debt consolidation. For example, a mortgage loan cannot be included in the consolidation. Generally, financial lenders consolidate credit cards, a line of credit, and personal loans.
Why should a person consolidate his or her debts?
If you have difficulty making monthly payments or find that you are paying too much interest, debt consolidation will allow you to:
- Reduce monthly payments
- Decrease interest rates
- Correct any payment delays
Who is debt consolidation aimed at?
In general, everyone can consolidate their debts, regardless of the amount. On the other hand, it is people who have too much high-interest debt (credit cards, etc.) that will benefit greatly. To obtain a consolidation loan, however, a person must have a good credit history and stable income.
A bank will only approve a consolidation loan if it is confident that borrower will be able to repay it. You learn more details about this process here.
What is a consumer arrangement?
A consumer arrangement is often confused with debt consolidation. In an arrangement, which is often called “partial consolidation,” the borrower offers a partial repayment plan of their debts over an extended period. For example, a person could offer to repay 50% of their debts over a period of five years (60 months).
In the case of such a proposal, the individual would make a single monthly payment, without interest, which would be distributed among their creditors. In short, this process allows people to settle their debts while respecting his or her ability to keep their assets (house, car, etc.).