Debt Consolidation

Debt Consolidation is usually a new loan from either an existing lender or a new lender where the loan monies are used to payoff one or more debts leaving the borrower with smaller monthly payments over a longer term. Home Equity Loans are commonly used for debt consolidation where a personal residence is used as security for the loan.

A Debt Consolidation Loan should be distinguished from a Debt Consolidation Settlement Program where the consolidation loan monies are used to pay the settlement amount forecasted for each creditor based on the financial capability of the debtor rather than the existing balance of the debts. Other than the consolidated settlement amounts paid to the individual creditors, the mechanics of both consolidation loan programs can be essentially the same.

In cases where real or personal property is used to secure the debt consolidation loan, the loan is referred to as a Secured Loan. Secured Debt Consolidation Loan lenders do not generally control loan proceeds or payoff debts other than those encumbering the property securing the loan. It is therefore up to the borrower to distribute the funds and payoff the consolidated debts as quickly as possible to avoid unnecessary interest and other charges, which might be assessed by the creditors.

Unsecured Debt Consolidation loans may be arranged by lenders for debtors having durable income and stable expenses. The justification for such loans is usually a recognizable financial hardship that was beyond the debtor's control and for which the debtor's financial history justifies the otherwise recent less than prime credit rating score. Unsecured Debt Consolidation loans proceeds are usually under the control of the lender to ensure that the consolidated debts are paid. Family and friends of the debtor often arrange Unsecured Debt Consolidation and Debt Consolidation Settlement loans. These are less formal loans, which should be in writing with terms and conditions having been carefully considered by the parties and properly drafted using appropriate language including terms and conditions within the laws governing personal loans and contracts.

Benefits - They can convert several small debts into one larger debt with lower interest rates and payments amortized over a long period time. Such loans can be for fifteen to thirty years if real estate or other durable property of the debtor is pledged as security.

Pros - Debt Consolidation usually improves the financial condition of the debtor by lowering their monthly expenses. In recent years this process can also help improve their credit rating, which can lower the interest or rates being paid on other expenses that are subject to credit rating scores.

Cons - When Debt Consolidation converts unsecured debt to secured debt there is a risk of loss of the property used to secure the new loan in the event of the debtor falls delinquent on making the required payments. We do not recommend a consolidation program unless it provides a financial advantage to the client at little to no more risk of loss of the property securing the loan than already exists given the debtor's financial condition.