People who have loans and multiple debts have an option of consolidating them into one loan or one debt. Debt consolidation involves taking one single loan to pay off multiple loans and other debts. The borrower is left with a single loan repayment. When a person borrows many loans from different lenders there are many repayments to pay on different dates. Even when the loans are from one lender he/she has to keep remembering the amounts to pay and the dates. This can be very harassing and the borrower can forget to make some payments on time which will affect the credit score.
Unsecured loans usually have a higher interest rate than secured loans. They may have a shorter repayment period than if they were secured. Unsecured loans can be consolidated into one unsecured loan or one secured loan by banks, credit unions and Debt Consolidation Companies. The company will pay off the unsecured loans with one secured loan which will have a lower interest rate and a longer repayment period than the unsecured loan. The monthly repayments will be lower in debt consolidation making a borrower who had difficulty paying the previous loans able to pay. However in the end the borrower will have paid more because of the extended repayment period.
A secured loan is secured by an asset or property which will serve as collateral. The borrower will provide the house or car to be held as the collateral. In case of failure to repay the loan the lender will have the legal right to re-possess the house or car and sell it to recover the loan, the interest and the associated costs. The house will be sold in a foreclosure auction. When a loan is secured the risk is reduced and the lender will grant the consolidated loan at a lower APR.
There are debt consolidation companies which will buy the loan at a discount especially when the borrower is threatened by bankruptcy. The debtor can look for a consolidation company which will buy the loan and grant a new loan to him/her.
Credit card debts bear very high interest rates and the debtor can find it hard to keep-up with the monthly repayments. A credit card debt can be consolidated to an unsecured or secured loan with a lower interest rate and lower repayments.
Students who have taken federal student loans have an opportunity of consolidating the multiple loans to one loan. They benefit from the debt consolidation because the interest rate of the single loan will be lower and also fixed. A weighted average APR is calculated by taking into the calculation all the current interest rates of each of the multiple loans. The student will lock the interest rate which will not be changed in the future. The monthly loan repayment based on the weighted average will be loan than the total of the previous loan.
Debt consolidation is very convenient because you will have only one loan/debt to repay.