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Debt Consolidation Loan Offers Lower Interest Comparing to Other Forms of Debt
- Good sources for debt consolidation loans
- Low interest rate as an advantage for debt consolidation loan
At the times of widespread credit exposure it is very easy for the borrowers to lose track of their finances and incur heavy debts that are difficult to control. Debt consolidation companies offer a good source for debt consolidation loans that are likely to reduce your monthly interest payments if you are heavy indebted with unsecured debt.
United States remains one of the main countries with the largest percentage of personal borrowing per person. The research shows that significant number of borrowers find themselves in the position of being unable to fulfil their financial obligations and fail on the repayment of their debts. It is not uncommon that an average American only contributes minimum payments on his or her credit card debt incurring significant amount of interest to be paid.
Credit card interest rates have always been much higher than the average personal loan interests due to the nature of credit card debt and the risk involved. Before the economic meltdown, the average interest on a typical credit card in United States was 13.9%- 14.9% which was on average 7% higher than the interest on personal loans. However, after the economy soured the credit card financial providers have escalated the interest rates to be paid on outstanding balances up to 29,99% annually. Needless to say, that many borrowers who were unable to repay total outstanding amounts were faced with the possibility of default on their minimum interest payments.
Many of the borrowers started looking for alternative sources of financing in order to reduce the interest payments. In this case, a variety of financial providers offer a good source for debt consolidation loans, which target the borrower group who are heavy indebted and seek for monthly interest rate reductions. Debt consolidation loans offer low interest rates when measured on weighted average scale.
Graph 1: Lower Interest Rate on Debt Consolidation Loans due to Securitisation by House Collateral
If, for instance, you have several credit card debts with the interest ranging from 13.9% to 29.99%, your consolidated debt loan interest rate would be a weighted average of the interest rates on your outstanding credit card balances. This means it would be lower than 29.99%. However, it would be still higher than 13.9%. Another factor that would be taken into consideration is the maturity of consolidated loan which would be extended up to 30 years, meaning that you have longer time to repay the loan and, thus, pay lower monthly interest rates. Lower interest on consolidated loans is the feature that attracts many borrowers to use this source of financing.
Financial providers can offer low interest debt consolidation loans mainly because it would require you to swap between unsecured and secured debt. This means that new consolidated loan would be secured against your home and, thus, would offer higher security for the lender. Should you fail on your payments, your home equity would work as a backup asset for the lender. There are two standard forms of consolidated loans such as reverse mortgage and home equity loan both of which are based on the core asset such as your home. Yet, before signing for any consolidated loan, it is important to look at all pros and cons of consolidated lending and not only focus on its main advantage such low interest payments.