While credit is useful for making occasional and everyday purchases at little or no upfront cost, debt can easily spiral out of control. Credit cards, overdrafts, hire purchases, loans and store accounts are invariably subject to high interest rates, requiring people to pay more each month than they may be able to afford – this is where debt consolidation can prove a lifesaver.
Debt consolidation is essentially a form of low or medium interest refinancing that is designed to make debts more affordable. Understanding the value of debt consolidation requires a comparative analysis of the ways in which monthly expenditures can be managed.
Without debt consolidation, a typical consumer may have several credit card debts, a store account (perhaps with a mail order shopping company), one or more bank overdrafts and a hire purchase loan on a car. Debts are often incurred during the winter and summer months, when Christmas presents need purchasing and the kids are off school. It is not unusual for a person to enter into several credit agreements before realising that all necessary costs are unaffordable.
Using the above example, the hypothetical debtor may owe several thousand dollars or more to his or her creditors. Unfortunately, debt tends to beget more debt; as one credit card limit is reached, another may be used to transfer a balance, buy the weekly shopping or make some other necessary purchase. This is usually the point at which debt begins to spiral out of control.
A credit card that is nearly or completely `maxed` out is likely to be subject to substantial interest charges each month. Although lenders usually offer a proportionally low minimum payment option, the interest accrued each month ensures that a credit card balance decreases only very slowly if the minimum is paid. When a balance is transferred to another card, there may be an interest-free grace period but a fee is often charged and repayments must still be made each month, during which time the fully paid off credit card might be used again once or twice.
Meanwhile, the rent or mortgage must be paid, the hire purchase loan has several years left to run and the overdraft fees are mounting. In no time at all, the credit cards and store account are relied upon for basic purchases, leading to even more debt. This is a vicious circle, one from which debtors often struggle to escape.
One way of coping with debts is to scrimp and save wherever possible, employing vulture-like tactics to reduce shopping bills, driving with great care to burn less fuel and switching energy suppliers for cheaper rates. Unfortunately, even if a household is able to save tens or hundreds of dollars each month in this way, it may not be enough to clear debts at a sufficiently fast rate. Debt consolidation, on the other hand, aims to do precisely this.
Debt consolidation, or refinancing, involves putting all the bad eggs in one basket. Instead of paying $100 on the car loan, $50 in overdraft fees, $60 credit card interest and $120 minimum repayment fees, debtors can consolidate their debts into one loan. A single loan means one monthly repayment and one rate of interest. It is often the case that debt consolidation loans, which are used to pay off all relevant debts such as credit cards and hire purchase loans, are subject to relatively low interest rates and affordable monthly repayments.
In order to find out more about debt consolidation, people ought to visit websites such as Moneysupermarket.com for help and advice. Such websites also offer tips for saving money on other types of expenditure, such as mobile phone contracts and utility bills.