Debt consolidation means taking one loan to pay off many others. The loan will be of a longer term compared to all other loans and with a fixed rate of interest. This help in managing the portfolio in an easy way and serving one loan only. It is simply a conversion of many unsecured personal loans into one unsecured loan.
The motive behind converting the unsecured loan into consolidation is to reduce the interest burden, so a borrower will try to convert his floating rate of interest on unsecured loan to fixed interest rate so that he can reduce his monthly expense to a great extent and also increase the duration of loan which help him to use the available money in other profitable projects. We all know that value of money is reducing day by day. So, the concept behind it is time value of money, due to which borrower thinks that the value of money today is more compared to later. Why to spend valuable things in repaying interest when it can be paid later.
For example a borrower using the credit card has to pay interest for the delayed payment. It is a type of unsecured loan where interest rates are very high compared to other unsecured bank loan. So it is better to consolidate such debt with lower interest rates and repay the credit card loan. So it is advisable to go for debt consolidation.
There are various types of loan available for individuals like consolidation loan for students, where they can plan out there monthly instalments based on their monthly income and diversify the tenure of loan. In such type of scheme a borrower student having federal education unsecured loan can consolidate his loan through Department of Education Loan.
The major reason of worry is that many people are tempted to convert their unsecured loans to consolidate secured loan by means of mortgaging their assets (home). It is true that the monthly interest rates gets lower but borrower ends up paying higher amount of loan as the duration of loan is increased. So the decision for going to consolidate the debt should be taken very carefully and if only the small amount of loan is remaining unpaid out of total loan then it is not advisable to go for consolidating loan and increasing the tenure of loan. There are debt consolidators available in market that negotiates about interest rates and duration of loan on behalf of borrower as a credit counsellor does.
There is a proper formal procedure to be followed while going for loan consolidation like a borrower has to make an application to the department and then it is reviewed for its eligibility for consolidation. Proper documentation are maintained and for any wrong or missing information direct inquiry through letter is send to the concerned borrower. The borrower has to reply for the required. There is also no minimum amount required to qualify for Direct Loan Consolidation, in addition consolidation id free!
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