A consolidation loan

A consolidation loanSociety became used to easy credit over recent years until the financial crisis caused by the Collateralized Debt Obligations (CDOs) brought a complete change in the financial environment.

The change was sudden. The financial sector included the traditional banks that based their approval of personal loans on a good credit score. Other lenders were less discerning and took the view that they could make larger profits by dealing in the subprime market where the risks were higher but so were the rewards.

Credit card companies were equally active in the market; credit cards had become the most convenient way to spend and they provided interest free credit as long as the monthly statement balance was paid off in full. Credit card companies require a minimum monthly payment but make the bulk of their money by charging high interest on any balance that remained outstanding after the minimum payment was made.

In the relaxed atmosphere before the crisis, credit card companies looked for expansion, often increased credit limits unsolicited and offered 0% balance transfers for a limited period. The result was that many people had a number of cards and the total outstanding balance over all the cards was often ignored.

The crash changed that. Defaults were the consequence of a rise in unemployment and defaults were common on mortgages, loans and credit cards.

Defaulting on a mortgage has the ultimate consequence of repossession; the dangers of other liabilities are penalties and high interest rates. A  Consolidation Loan is one way of saving money on a monthly basis but a successful application is dependent upon demonstrating the ability to repay the loan in monthly installments.

The exercise of looking to saving money is to write down all the liabilities and finding a total debt. It is fairly simple to write down the current monthly repayments expected; it may make very poor reading.

Many lenders offer ways of saving money by offering a consolidation loan to make one single monthly payment instead of the number of different payments. It may be at a rate of interest much higher than loans granted to people with good credit scores but it will certainly be much lower than credit card interest.

Consolidation loans require approval; approval will only come if the applicant can provide employment and bank details showing his or her ability to repay. There are many lenders whose websites make it easy to find out the best offers on the market. All emphasize that their loans are a means of saving money; they inevitably offer online application without the need to talk to strangers about private, and possibly, embarrassing matters.

There is a word of caution in this saving money exercise. If it was credit cards which caused the problem in the first place, the temptation is still there if the applicant still has credit cards. If a consolidation loan eradicates the balance on the card, there may be a credit limit tempting the owner to start spending once again.

That temptation must be resisted. A credit card is certainly convenient but it is dangerous. It is absolutely essential that if a card is to be used, the monthly balance must be paid off in full. Any other behavior can start the problem all over again and a second consolidation loan is unlikely to be an option while there is a current one running.

Most people have learnt the lesson. Governments and major institutions have found out the hard way as well. A household budget is the answer to the present and future; only spend what you earn or problems may happen again.

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