Chicago, Illinois (PressExposure) January 30, 2012 -- In the aftermath of the financial crisis of 2008, and despite regular report that there has been significant stabilization in the housing market, the credit crisis has not subsided. An increasing number of individuals find themselves faced with unmanageable amounts of personal unsecured debt, primarily high credit card balances. As such, credit card debt forgiveness continues to grow and remains, for many, to be the best answer to managing unwieldy debt balances.
How It Works
One of the reasons that credit card debt forgiveness has been so successful is the ability of all parties to benefit from a debt consolidation loan. The lender is able to offer the loan at a rate that is profitable, and high relative to traditional loans. This gives the lender the ability to mitigate risk when making a loan to an individual who has already proven to have credit problems. The lender earns enough on a given loan than it covers those few borrowers who end up completely defaulting.
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The advantage to the borrower is that the terms available on the new loan are better than on the original loan. The borrower takes a single new loan which is used to pay off all of the smaller debts that are being consolidated, usually several credit cards. The lower interest rate and, more importantly, the longer loan duration make the consolidation loan more manageable for the borrower. Additionally, it has been shown that when a borrower has a single payment to manage, as opposed to each individual credit card payment before the loan consolidation, he or she is more likely to be able to consistently service the debt.
Given all of the potential benefits to all parties involved, one may wonder if there are any drawbacks to taking a debt consolidation loan. There are, in fact, a few downsides that should be considered. First, there is a potential impact to one's credit from taking this type of loan. That impact will be far less severe than a default, but being aware of the consequences is important. Secondly, over the course of the new loan, the borrower may end up paying more total interest that under the original debt. Despite the lower interest rate, the longer payoff period may create a higher overall interest cost. Overall, however, a consolidation loan can be an effective tool to managing one's debt burden, particularly when used effectively and only when needed.