Debt Consolidation
Debt consolidation can be an easy way to combine out-of-control payments. Protection from scoundrels can be avoided with research.
Debt consolidation is the process of taking out one loan to pay off a number of others. There are several reasons someone might take out a consolidation loan. Three of the leading reasons being:
- To get a lower interest rate.
- To obtain a fixed interest rate.
- For the ease of paying only one loan.
A consolidation loan can transfer several unsecured loans into one unsecured loan, but, more times than not, it transfers several unsecured loans into a secured loan. A secured loan holds the borrower’s collateral, such as a house, or car, against payment of the loan. This allows for a lower interest rate, because the lender’s risk is decreased.
Due to borrower’s wanting to reduce high interest debt balances, loan companies often take advantage and charge exorbitant fees for making the loan. Some less ethical companies thrive on people who back themselves into a financial corner. If the client doesn’t refinance soon, they might lose their house. With no time to shop around for smaller fees, the unscrupulous agent will offer debt consolidation for an ample fee. This controversial practice is known as predatory lending.
Being thrown to the lions
Predatory lending usually occurs on secured loans that have substantial collateral. This allows the lender to profit by repossessing said collateral when the borrower fails to pay the loan. This is argued as an abusive and unfair means of business. These loans always come with high interest rates. Some types of predatory loans include:
- Payday loans
- credit cards
- bank overdraft protection loans
- car title loans
- tax refund anticipation loans
- single premium credit insurance
- car loans
- risk based high interest loans
Organizations such as the AARP are working to stop predatory lending. Opponents of the practice cite that most predatory lending is aimed toward minorities, low income families and the elderly.
There are others, like the National Home Equity Mortgage Associationm who believe that high-risk loan practices are not predatory, but a means to create loans for lower-income borrowers that otherwise couldn’t afford a loan.
Student loans
In the United States, student loan consolidation is handled in a slightly different way than other debt consolidation loans. Since student loans are guaranteed by the government, they are bought by either a government approved loan consolidation company or the U.S. Department of Education.
This allows interest rates to be regulated closely, basing them on the year’s student loan rate, which is based on the 91 day treasury bill rate at the current year’s auction in May.