Debt Consolidation
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Filed under Debt Consolidation
Debt consolidation refers to the practice of combining unsecured debts by taking a loan to pay them. The underlying purpose is to lower the interest rate, get a fixed rate or to serve only one loan. For instance, instead of paying four or five banks, you can pay only the debt consolidation company, which will further disburse the funds on your behalf.
A consumer can save a lot of money in the long run through debt consolidation. This is because it reduces the total balance and prevents late fees being charged.
A debt consolidation program typically secures Visa and MasterCard credit card loans, since these are unsecured, among other items. Secured loans, such as car and mortgage loans are not governed by a consolidation program. The new loan needs to be backed by collateral, usually a house.
Creditors usually approve of consolidating debt, since it yields them money rather than not getting back anything if the debtor declares bankruptcy. Under Chapter 7 Bankruptcy, debtors can erase the debt completely.
Debtors sometimes are offered discount by agencies that offer debt consolidating services. These companies buy the loan at a discount if a debtor is on the verge of bankruptcy. Therefore, a debtor should carefully select a debt consolidating service that offers attractive plans and maximum savings.
Government Debt Consolidation
Government debt consolidation can be of two types:
- A government seeking debt consolidation for its loan, which it usually issues through bonds.
- Debt consolidation offered by the Federal Government, at least for student loans.
Sometimes states, counties and municipalities opt to consolidate their debt when interest rates are low. Governments do this by issuing fresh bonds to pay out outstanding bonds. No penalty is levied on early bond payments.
The chief financial officer or the finance director recommends consolidation of bonds. The process has to be completed under the supervision of a bond attorney due to the legal complications involved.
Government debt consolidation may provide a guarantee to a student loan. It does not offer a consolidation program directly. The government does not consolidate Federal Emergency Management Agency (FEMA) loans and small business loans.