Loan Consolidation

Debt consolidation can simply be from a number of unsecured loans into another unsecured loan, but more often it involves a secured loan against an asset that serves as collateral, which is most commonly a house. In this case a mortgage is secured against the house. The collateralization of the loan allows a lower interest rate than without it, because by collateralizing, the asset owner agrees to allow the forced sale (foreclosure) of the asset in order to pay back the loan. The risk to the lender is reduced so the interest rate offered is lower. One needs to be careful in re-financing or getting a second mortgage because it could still lead to financial hardship.

Debt counselors are professionals who can guide you on lowering your debt without bringing you to financial ruin. In many cases the debt counselor gets involved with your creditors and gets all of your debts combined into one to reduce your interest rate. Your creditors many times see the advantage to this method of refinancing as opposed to you having to feel the need to file for bankruptcy where everyone looses. They are out the money and your credit history is ruined for at least seven years or more. You then make one payment to the credit-counseling agency and they in turn make payments at the negotiated rates to the various lenders. Negotiated reduction does not usually involve any collateral and loans that already depend on collateral cannot usually be included in the debt consolidation. A negotiated reduction is favorable in that it can help reduce the chance of bankruptcy. It has some strong advantages, but it is an admission that you are unable to pay the debts you have incurred. The original lenders may report to the credit bureaus that they are now being paid through a credit-counseling agency.