Debt Consolidation: How Did We Get Here?


Debt consolidation is a very old financial technique but hasn't been much of a concern to most individuals until recently. During the tech and following real estate boom, all one needed to get just about any type of credit was a pulse and a pen to sign the forms.
This led many individuals to take up offers that looked good on the surface but that were total debt traps once the conditions of the fine print were put into play. While one cannot necessarily get out of these obligations, one can rearrange them in a way that's more advantageous to the consumer.

Debt consolidation is used for loans both large and small though it's the smaller types that sometimes end up causing most of the trouble. Revolving sources of credit, such as credit cards, are particularly notorious in this regard. One may only have $500 on one credit card and $1,000 on another, but both of those debts will be racking up interest, be subject to their own individual fees, penalties and, frankly, charges for who-knows-what and other burdens placed upon the customer by the lender. In these cases, rolling these debts into one account is often a good idea.

This is the basic idea of debt consolidation: reducing interest and fee payments by combining two or more smaller debts into a larger debt that benefits from the terms offered by larger loan amounts. There are several agencies that offer this service. Some of the agencies set up long-term loans designed to deal with very large debts and others give smaller loans to allow consumers to simply get rid of one or two creditors with whom they no longer wish to do business and to put the debt into a different financial product.

If one is taking out a large loan for the purpose of debt consolidation, then it's obviously necessary that that individual have a decent credit rating. This credit rating on which consumers are required to depend is a highly volatile figure. It can move down very quickly and is sometimes seemingly-impossible to restore to an acceptable level. Most lenders do use this system and the customers of those lenders can expect to receive very little in the way of customer service if their credit score is less than that demanded by the company. Mistakes are rampant on these reports and tend to stick.

Most types of loans are eligible for debt consolidation. Before the real estate crash, consumers were beginning to use a refinancing of their house as a way to consolidate debt in great numbers. This model has its advantages and disadvantages. The advantage is that mortgages typically have lower interest rates than other types of loans, owing to the large amounts financed. However, the disadvantage is that it keeps the consumer trapped in the traditional credit system which is likely to blame for much of the difficulty that ended up requiring the consumer to consolidate a large amount of debt.

Lenders that offer consumers the opportunity to avail themselves of the advantages of debt consolidation need not be large scale lenders, the sort of lenders that allow consumers to switch from one debt trap to another or even lenders that rely on the traditional system of credit scoring to determine an applicant's worthiness. This system, while it is the dominant system of lending and borrowing in this country, is a function of the free market and, as such, consumers are free not to participate in this sort of lending if they find it works against their best interests.

One may want to consider a different route to debt consolidation. This can include the strategic and intelligent use of other sources of funding that may allow several smaller debts to be rolled into one loan that is easily repaid at good terms. Many lenders now operate without the credit scoring system playing a factor in how they allocate their lending and this represents an alternative way for consumers to conduct their business. These lenders oftentimes specialize in writing loans with a low principal which is designed to be paid off very quickly rather than to become another monthly payment.

Loans written for small amounts, such as payday or auto title loans, can definitely play a role in debt consolidation. Having these small debts rolled into one larger loan allows the consumer to avoid late fees and other charges applied to the original loan and makes it much easier to make payments as there's only one lender with which one must deal. These loans also come on very simple and easy-to-understand terms, which differentiates them from most types of fast credit in significant regard. Payday and auto title loans are available to most anyone with an income and a vehicle.