Debt Consolidation loans are the type of loans that allow customers (individuals or firms) to combine various debts into one monthly payment. That simply means that instead of following up with various banks and on various dates, they would make one monthly payment to a debt consolidation intermediary. The debt consolidation company then disburses the funds to the creditors for the client.
Debt consolidation companies are able to make the life of consumer easy by turning all their debt payments into a single monthly payment and that too with a less rate of interest. It can be easily seen that the consumer ends up paying more in case of multiple payments to multiple banks when compared with payments made, long term, to the debt consolidation company. With the correct type of debt consolidation loan, customers also preserve their credit rating, which is important to all lending companies when considering any kind of loan.
The debt consolidation company allows the consolidation of debts that are unsecured like, credit card and student loans. Mortgages and car loans are not considered for debt consolidation since they are already secured loans. The debt consolidation company, by virtue of its good relationship with creditors, is able to negotiate a lower rate of interest with confirmed on-time payments. Hence, this becomes a win-win situation for all – the consumer, the debt consolidation company and the creditors.
There are a lot of private credit card companies that continually contact customers promising “lower payment “ each month. Eventually, it turns out to be trap for the consumer as the minimum payment just fulfills the interest obligations of the loan. The principal amount keeps drawing more and more interest and hence it becomes a long -term obligation with smaller payments. Therefore, customers have to be very careful in assessing the exact terms, when such offers of balance transfer come from other credit card companies. This trap typically causes the situation where debt consolidation becomes necessary.
There are various organizations that provide counseling for debt consolidation loans. These are generally government affiliated non-profit groups. The group evaluates the liabilities of customers, their overall debt and counsels them to avoid further debt by managing money in a better way.