Debt Consolidation
Debt consolidation loans consolidate debts. Small debts are collected under the aegis of one larger loan. To use one particularly loathsome metaphor (though not, as it happens, necessarily inappropriate), think about your own family’s trash consolidation schedule – or, as most households think of the practice, trash day. Various waste baskets of limited capacity are together thrown into one sizable garbage can. Simple, yes, but is that really the extent of the duty? There are other details to consider. For towns with recycling programs, glass must be separated from plastic and placed in separate bins. Paper and cardboard have their own special container, or, perhaps, depending on the family, best utilized as kindling for the hearth. These details do matter.
Gruesomely poetic, but this is relevant to debt consolidation for two reasons. With cash strapped households, it often makes more sense for them to spend the time returning bottles to stores or recycling centers that return money for the privilege. Also – and, perhaps more importantly – after a particularly long or wasteful period, many families find that their main garbage can would overflow with the entirety of their detritus and must make choices. This is the essence of debt consolidation. In order to convince the borrowers to pay the (often extravagant) sums involved, loan officers must reduce interest rates, but there is such a thing as good debt and bad debt. Car loans, for one example, rarely boast rates much worse than what would be offered by debt consolidation. The consumer’s overall payments would drop, of course, due to the artificially extended terms. Decreasing one percent of said consumer’s interest rates while lengthening the time spent paying back the loan by ten or twenty or however many years does not, however, make the slightest bit of financial sense. Regardless of the momentary (although admitted) allure of freed cash flow, debtors shall find compound interest a harsh mistress.
Of course, for some individuals expecting a sudden windfall of funds, the debt consolidation approach may actually be of benefit regardless of the outlined terms. With the proper credit, borrowers may be brought debt consolidation loans essentially without interest for the first year or two. Debtors utilizing such a strategy would nonetheless be surprised to see their credit scores actually fall once all lenders (save one, should go without saying) have been satisfied. Almost nobody understands the mathematics behind the Fair Isaac Corporation’s scoring system utilized by the three primary credit bureaus Equifax, Experian and TransUnion. The inventor of the scores Earl Isaac – the first man to have ever crashed a computer, as legend has it – implemented a series of ever more complicated logarithms more than fifty years ago that not only discern an individual’s payment history but also their current credit availability. Instantly paying back each and every creditor (aside, again, whomever holds the consolidation loan) spooks the super computers that currently rate the credit of all the western world. Moreover, much as professional analysts outside the FICO compounds comprehend their practices, too many open credit accounts absent balances – irrational as this may sound – also makes the logarithms nervous.
Once again, for borrowers that have maintained such sparkling credit scores as to receive debt consolidation loans for negligible interest, they should soon be able to restore their credit rating once the initial debt consolidation has been paid. It should be underlined, though, that such offers only apply to the slightest minority of borrowers needing such a loan. While so-called signature loans (essentially, another unsecured debt) do exist for members of the moneyed elite down on their luck, most every other consolidation loan comes only through the pledging of collateral – homes, traditionally. One of the reasons that the debt consolidation alternative has spiraled in popularity the last decade has been the similar rise of predatory mortgage loan officers.
In the past, when mortgage loans first began to be made available to common Americans without much in the way of down payments, loan officers were little more than junior professionals in the larger banks or managers in community savings and loans. To this day, they generally do not have any training similar to what consumers expect from, say, their realtors, and, until recently, needed no licensing or certification at all. Following the lapse of governmental regulation, many lenders sprung up with shambling salesmen promising funds to homeowners that, in previous years, would never have been permitted. This trend in the industry toward sub-prime scavengers drew a number of unfortunate sorts toward a momentary explosion of easy funds which exploited their supposed clients’ greed and naivete. This sub-prime lending crisis has, arguably, been one of the leading causes of our current economic woes, and, without a doubt, the failure of so many mortgage companies and the accompanying foreclosure boom has led to the free fall of home values nationwide.
The preceding paragraphs have been intended not only to provide some explanation as to why borrowers of modest credit scores may find debt consolidation loans far more difficult to obtain under current circumstances but also as a caution about so flippantly trading away their home equity for a temporary peace of mind. With the national economy at a turning point and so many regions of the country witnessing property values fall drastically by the month, homeowners should be very, very careful about touching the safety net of what will most likely be their greatest lifetime investment. More to the point, anyone should be concerned about borrowing upon their shelter to pay back yesterday’s addled spending. Debt consolidation loans, for a teensy percentage of suddenly aggrieved debtors, can be a saving grace. It is easy, the consequences as to credit are relatively small, there are potential IRS write-offs for those with determined tax accountants, but, for most homeowners bothered by telemarketers or hounded by mailings from their own bank, it is an option best left alone.
Debt Settlement
Compared to the relative obviousness of debt consolidation loans once borrowers are aware they exist, debt settlement programs are far more difficult to explain within the space limitations of this essay. Debt settlement is, as you have probably guessed, a very new industry. Settlement negotiation originally began as a plaything for industrialists unable to pay their minimum bills after the late 1980s stock market crash but yet unwilling to surrender their assets to government mandated disposition. Bankruptcy was still then fully available to most every borrower, and a few financiers realized they could use this threat to their advantage. By repeatedly boasting about their decision to undergo government protected debt elimination, they managed to have lenders cut the balances owed by more than fifty percent in exchange for an agreed upon payment schedule promising to pay back the remainder due in less than five years.
As you would assume, our current situation – national economy beholden to foreign powers, manufacturing jobs (or most any offering a living wage) vanishing every second, scarcities among gas and food and household necessities approaching critical levels – has created a small boom within the debt relief field. Consumer Credit Counselors ply their ever more suspicious trade (beholden, as they are, (more…)
