Financial advisers often ask debtors to consolidate their debts for coming out of financial mess. But exactly what is consolidation? In simple words, debt consolidation is linking up of all debts and converting them into one or two large debts. But why would anybody want to do that unless there is something to be gained from the effort?
As a matter of fact, there is something to be gained from the effort. For starters, all debts will come under one roof, and therefore, it is not easy to forget any one of them. If a person has many debts, it is possible to overlook the date of installment and that can adversely affect the credit score, even if the delay is merely of three or four days.
Secondly, it is possible to negotiate interest rates on such consolidated debts. Some loans in the total borrowings are rather expensive, even if they are smaller and taken for short term. Loans taken for consolidating debts on the other hand are secured loans. This means that the lender is at liberty sell the real estate property which has been mortgaged by the borrower for availing the larger loan. However, lenders can only invoke such rights, if the borrower fails to keep his or her end of the deal, i.e., does not pay agreed equated monthly installments.
Theoretically, lenders should never go on loss because of the security provided. Therefore, they do not face as much risk as lenders of unsecured loans. Moreover, secured loan claims rank higher in any bankruptcy proceedings. Because of such advantages, interest rates on mortgage loans are a tad lower than the weighted average interest rate on all individual debts being consolidated.
Another advantage of debt consolidation is that installments can be increased or decreased based on the convenience of the borrower. Lenders would of course prefer to receive their monies at the earliest. But the borrower may not be able to pay that much each month. In the process, there is likelihood of the borrower defaulting on his or her obligation, and the lender may be forced to run around courts either under bankruptcy laws, or initiate foreclosure procedures for recovering the monies. To avoid such problems, lenders and borrowers can negotiate easy monthly payments in such a way that borrower can easily accommodate it in his or her monthly budget. Correspondingly, loan term may have to be extended.
Borrower can also easily keep track of outstanding indebtedness at any point of time. This helps borrower to realize whether or not he should be availing another loan or not.