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One of the very first options that will come to mind when individuals experience problems concerning personal debt is taking out a debt consolidation loan. Often as the only solution that individuals are aware of for overcoming personal debt, it is usually chosen before any other debt solution choice. With so many choices available for dealing with debt, one should keep in mind that the larger majority of these choices or ideas are designed to make someone else money.

Borrowers need to remember that borrowing money is what started their problem with debt in the first place, so borrowing money to pay back borrowed money is not always the best solution for solving their problems with debt. Simply stated, borrowing more money to pay on borrowed money should be the last action taken. This article will give some enlightenment on the practices that need to taken to unravel yourself from personal debt problems in the long term, and to highlight some of the consequences related with debt consolidation loans.

Consequences:-

Why Debt Consolidation Can Be So Attractive:

• One of the main reasons people find debt consolidation so attractive is the idea of having only one payment instead of many payments. While this could be beneficial to an individual that has problems keeping track of all their debts and payments, this should be a minor consideration compared to whether the debt consolidation loan will in actuality solve your debt problems. Rather than making the situation worse by taking on another loan, it would probably be better to find some useful useable systems to help get yourself more organized.
• Another idea that makes debt consolidation so attractive is the promise of lower monthly payments. The length of time you spend repaying the loan should be just as important as how much has to be paid each month. A reduction from $500 per month to $250 sounds attractive, but if the $250 monthly payments have to be paid for 5 years when the $500 monthly payments would have only had to have been paid for 2 years, it looks bad on paper.

$250 x 60 months (5 years) = $15,000

$500 x 24 months (2 years) = $12,000

$3,000
You end up paying $3,000 more than the original amount of the debt owed to clear your debts.

Debt consolidation is not always a bad option, but the choice to consolidate debt through another loan should be researched and weighed carefully against other choices before choosing that route.

Consequences:

When a Debt Consolidation Loan is Advisable:

• When you have high interest rate debt.
  • When interest rates have plunged a considerable amount since the time you took on your debts.
  • When you have weighed the factors and know that you will be to make the payments on the loan.

You must have an understanding of what you can and cannot afford as far as terms of payments. Prepare a Personal Finance Statement. Templates are available many places online.

Consequences:

When to Avoid Debt Consolidation Loans:

• When you have defaulted on previous debt consolidation loans.
• When a loan is required to pay off a previous debt consolidation loan.
• When you want to pay your credit cards off with a loan in order to continue using those credit cards.
• When your exact financial position has not been worked out and you do not know how much you can afford to pay each month.
• When the amount of your total debt compared to the total loan payment amount has not been figured.
• When you have used your home to secure the loan. Consequences:

Why to be Mindful of Secured Loans:

• Often only homeowners are able to get debt consolidation loans because the loan is secured against their home. Their home is used as collateral for the loan. If the homeowner defaults on the loan, the lender will sell the home to get their money back.

Possible Consequences:

• Overall debt will be increased because the time period in which the monies must be repaid will be extended over a longer period of time.
• The underlying cause of the debt was not addressed and the knowledge of how to deal with debt problems in the long term was never obtained.
• The situation could become worse than before if payments on the new loan are not kept up.
• If your loan is secured against your home, you could lose your home if you default on your loan.

Consequences:
Conclusions:

If the choice is made to go through with debt consolidation, research your options, shop around. There is no shortage of companies offering debt consolidation loans out there. Always know what the total amount of repayment will be compared to the original amount of your total debts.

For long term solutions to problems concerning debt you should understand your financial situation and try to negotiate with your creditors to make payments on your debts that you can actually afford. You must also learn to live within your means and not be irresponsible with your spending.

While debt consolidation loans are one of the first options considered when individuals are deeply in debt, they are rarely the best solution. Research the topic for yourself, so that you understand the consequences and know when debt consolidation should be avoided or advisable.

See Also: Debt Consolidation Tips

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The one industry that seems to be weathering the bad economy the best is the collection agency industry.  Sure, they’re a needed commodity, but it seems that many of the ones around today have come out of nowhere and are going after dollars that either have already been paid or aren’t allowed to be gone after in the first place.

Rubin & Raine Inc., whose company’s corporate offices are out of Eatontown, NJ, was recently the subject of an investigation by the state of New Jersey for attempting to collect on bills that were past the state’s statute of limitations, which is only six years.  Some of the bills they were trying to collect on were also already paid.  These were old hospitals bills, and they hadn’t verified whether any of the bills had already been paid before starting their efforts.  They have agreed to cease trying to collect on any claims older than six years and to verify whether the accounts are open or not.  This could be a problem since the hospital whose claims they’re working closed in 2007.

In another story, a Michigan collection agency, International Collection Services, has lost its license to do collections in the state because they were collecting payments from people, then instead of informing their clients that they had received the payments were using the money for other purposes, in essence keeping people’s name on credit reports instead of closing out accounts and sending their client’s the portion of what they’d collected. 

And finally, in New York State, Attorney General Andrew Cuomo hit 3 collection and debt consolidation businesses with penalties totaling $245,000 and got agreement to change their collection techniques.  The three companies were Creditors Interchange Receivable Management, LLC, Capital Management Services, LP and Tri-Financial, LLC.  There was no official word on what they did, and none of them admitted any wrongdoing, but all said they would comply with the Fair Debt and Credit Collections Act. 

This followed Cuomo closing a collection agency, which actually ended up being two agencies owned by the same person. Lamont Cooper and two debt collection firms he owns that operated in the state, Emanee Development, Inc. and Dial Tech LLC., were ordered to shut down, and Cooper was ordered to pay restitution to consumers statewide. Cooper and his companies are permanently barred from engaging in the debt collection business and acting as brokers that buy and resell portfolios of consumer debt.  The attorney general’s office alleged that Cooper’s companies told debtors that they were criminals, threatened lawsuits and arrest, engaged in third party disclosure, and other violations.

Not all debt collection agencies are bad, but the behavior of these agencies points out that all of us have to be vigilant in protecting our names and our credit histories.  If you believe you’re paid a bill and are still being pursued, fight it.  Ask for proof, and if you’re not satisfied, take it to someone higher.

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Debt consolidation is the process of obtaining one loan to pay off many others. Most often consumers do this to secure a lower interest rate, to secure a fixed rate on their debt or for the convenience of having to pay only one loan.

Debt consolidation can entail converting many unsecured loans into one secured loan. More commonly consolidating debt involves one secured loan against some type of asset that serves as collateral, such as a home mortgage or savings. Using the home mortgage as collateral often secures a lower interest rate, but also allows the forced sale of the home to pay back the loan. The lenders risk is minimized; therefore the interest rate is often lower.

Debt consolidation companies can reduce the loan amount. The loan is bought at a discount when the debtor is in danger of bankruptcy. Debt consolidation can affect the debtor’s ability to unload debts in bankruptcy; the determination on whether or not to consolidate must be thoroughly thought through and weighed carefully.

Theoretically, debt consolidation is most often recommended for those paying large amounts of credit card debt. Because of the larger interest rate often carried by credit cards, often the larger unsecured loans from a bank, acquiring a secured loan using property as collateral to obtain a lower interest rate is often advisable. The total cash and interest paid towards the debt is lower allowing the amount to be paid sooner.

The advantages that debt consolidation offers debtors with high interest debts brings companies wanting to take advantage by charging high fees for refinancing in their debt consolidation loans. Often the fee amounts nearly reach the state maximums for mortgage fees. Some unprincipled companies will intentionally wait for a debtor to get so far in debt that they must refinance and consolidate their debts in order to pay off bills that are past due. Often the debtor will pay the high fees so they do not lose their home. Sometimes the debtor does not know to shop around for lower interest rates and fees, or does not have the time. Companies that partake in this practice are known as predatory lenders. Most debt consolidation loans and transactions do not include predatory lending practices.

See Also: What are the benefits and Negatives of debt consolidation?

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USA (United States of America)

In the United States, student loan consolidation entails the purchasing and closing of existing student loans by a loan consolidation company or the Department of Education. Student loan consolidation interest rates are based on that year’s rate, which is based on the 91-day Treasury bill rate at the last auction in May of each year.

Interest rates on student loans can often fluctuate from the current low of around 4.7% to a maximum of 8.25% for Stafford federal loans, 9% for PLUS loans. The student loan consolidation program that is currently being used allows a student to consolidate with a private lender once, and re-consolidate again only with the Department of Education. When a loan is consolidated, a fixed rate is set based on the current interest rate. If a loan is re-consolidated, the interest does not change. When different types of loans and different rates are combined into one new consolidation loan, a calculated weighted average will establish the appropriate rate based on the current interest rates of the different loans that are being consolidated together.

Refinancing is often the term used when referring to federal student loan consolidation. This term is not correct because the rates on the loan are not changed, they are just locked in. Student loan consolidation does not incur any fees for the borrower; unlike private sector debt consolidation where private companies make money on student loan consolidation by reaping subsidies from the federal government.

The consolidation of student loans can be beneficial to a student’s credit rating, yet it is important to remember that not all federal student loan consolidation companies report their loans to all credit bureaus.

UK (United Kingdom)

Student Loan entitlements are guaranteed in the UK. The loans are recovered using a means-tested system based off the student’s future income. Student loans cannot be included in Bankruptcy in the UK, but the loans do not affect a student’s credit rating because the payments are recovered from the student’s future salary.

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In these tough financial times, I’ve been a big proponent of people cutting up credit cards with high outstanding debts and paying them down.  In general, that goes counter to what many financial analysts have been telling people to do, saying it will bring down credit scores.

My point has been that credit scores mean nothing if a person continues wracking up more and more debt, as that also hurts one’s credit score, and that it’s better to gain control over spending while working towards getting out of debt.  A high credit score only tells people that you look like a good risk at getting more credit.  However, if you’re already overly maxed out, you’re already past the point of no return, and it’s more important to gain control.

That’s why it was good seeing a statement coming from Greg McBride, the senior financial analyst at BankRate.com.  He stated just what I’ve been saying for months now:  “Consumers have a tendency to focus on the nuances of credit scoring and often lose sight of the bigger picture.  They are so worried about something hurting their credit score, particularly in an environment like this one where lenders are tightening up and making it harder to qualify, that they are willing to live with bad terms that they never would have agreed to in the first place.”

These days, credit card lenders have started penalizing their good paying customers to recover from those customers of theirs who have had problems keeping up with their debt.  Recently, Capital One began jacking up some of their customers rates more than 7% in an attempt to get back to solvency.  American Express went a different way, by capping limit amounts on cards and making people pay more to pay off their monthly balances.  Both alienate their customers, but the worst part is financial “experts” going on TV telling people that they should just accept the limits, pay off the cards, and protect their credit scores.

If you’re someone who pays off your monthly balances as soon as you accumulate them, having your interest rate jump that high that quickly may not impact you much at all.  However, if you’re someone who carries a balance, it might not be in your best interest to keep that card, especially at a much higher rate.

A calculation might help you understand what you might be up against.  Say you have a balance of $2,000, an annual percentage rate of 13.9%, and your monthly payment at the present time is $35.  If you always paid $35, even though the amount of your minimum payment will go down with your balance, you’d end up taking 7 2/3rds years to pay off your balance.  If you take those same numbers, only increase the APR to 20.9%, it would take you 25 3/4ths years to pay off the same balance.

Is it worth any credit score to allow banks or other lenders to take that kind of advantage of you?  It’s something to seriously think about.

See more:
Credit Card Debt Consolidation
Should I Cancel My Credit Cards?
How to Get Out of Debt Part I