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Loan Consolidation.
Definition
of consolidation
loan
The replacement of
multiple loans with a single loan, often with a lower monthly payment
and a longer repayment period, also called consolidation loan. also
called debt consolidation.
Loan consolidation - legal definition
| The combining of a
number of loans into a single new loan. Consolidation
typically extends your repayment period and lowers your monthly
payments. |
From Wikipedia, the free encyclopedia
Student loan
consolidation offer individuals with student loans the ability to
consolidate multiple Stafford
and PLUS
loans into one loan agreement.
The fixed interest rate on
the consolidated loan is based on an
average of the loans that are being consolidated, but the repayment
term is set at 30 years, typically lowering the monthly payment. Since
the borrower has the right to prepay student loans, the consolidation
loan offers greater flexibility to the student.
Debt consolidation
entails taking out one loan to pay off many others. This is often done to
secure a lower interest rate, secure a fixed interest rate or for the convenience
of servicing only one loan.
Debt consolidation can
simply be from a number of unsecured loans
into another unsecured loan, but more often it involves a secured loan
against an asset that serves as collateral, most commonly a house. In
this case, a mortgage
is secured against the house. The collateralization of the loan allows
a lower interest rate than without it, because by collateralizing, the
asset owner agrees to allow the forced sale (foreclosure)
of the asset to pay back the loan. The risk to the
lender is reduced so the interest rate offered is lower.
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Concerns of consolidation
In recent years, reports in
the media have raised concerns about the use of consolidation loans.
The worry is that many people are tempted to consolidate unsecured debt into secured
debt,
usually secured against their home. Although the monthly payments can
often be lower, the total amount repaid is often significantly higher
due to the long period of the loan. Debt consolidation sometimes only
treats the symptoms of debt and doest not address the root problem. In
some circumstances, snowballing debt may be a better
solution.
There are other
alternatives to a debt consolidation loan, where
unsecured debt is not "shifted" to secured debt, but is eliminated
through a settlement or payment plan. Debt consolidation can be
confusing for many people, so it is helpful to learn about all of your
options, and sometimes with the help of an advisor.
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