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Pros and Cons of Debit Consolidation

Posted on May 13, 2010
Filed Under Finance, Self Help | Leave a Comment

Debit consolidation implies bringing all the debit balances, i.e., the debts under few larger debit consolidation loans, be they mortgages or unsecured loans. There are several advantages of debit consolidation. For one, the borrower can get a better deal that improves his or her monthly cash flows. Cash flows are crucial in both personal finance as well as business finance. They can put borrowers at the mercy of the lenders. If the borrower is unable to pay the installments on any borrowings then the lenders can damage the borrower’s credit reports, even if the borrower has ample assets having equity, which may far exceed the amounts that have been borrowed.

However, how does debit consolidation help in improving cash flows? The borrower can get debit consolidation loans at lower interest rates, or increase the repayment term, which effectively brings down the monthly installments, and consequently, monthly cash outflow. Of course, the borrower has to study the terms and conditions before accepting any debit consolidation loans. The weighted average cost of all borrowings will indicate to the borrower. How much is the interest that he or she is paying on the debit balances as of date.

Extension of the repayment term is good for cash flows because they equated installments get spread over a longer period. As far as can be seen, the borrower may feel that he or she is paying more interest in the process. However, that is not true. Equated monthly installments remain constant throughout the loan repayment period. Over the years’ purchasing power of the money comes down because of inflation. If discounted cash flows were considered, based on inflation, the borrower would realize that he or she has, in fact, gained with such extension of the repayment term.

Lenders look for customers with good financial discipline, good income levels, and adequate security preferably in a form of some real estate asset, or government securities. However, lender would look for the margin in values of these assets. Therefore, if a borrower has taken loans of $17000, and has a real estate asset valued at $15000, then lender is hardly going to feel very secure about granting any mortgage or re mortgage loans on the asset being offered as security. This is because there is no equity remaining in the asset to secure the lender.

The lenders also offer debit consolidation loans to individuals who do not own any real estate asset. These are called unsecured debit consolidation loans. They obviously carry higher interest rates. Lenders offer such loans to only those customers who have been regularly repaying their installments or who could become regular in loan repayments with such consolidation of debits. There is always a competition between lenders to corner good clients. Therefore, if the lender is of the opinion that the borrower has a good credit score then such unsecured debit consolidation loans may be offered to the borrower at very attractive interest rates. Larger loans mean larger business for the lender, and if the credit score is good, there is less risk as well. Lenders bring down the overheads involved in studying the credit profile of a new borrower. Such overheads include time of a qualified professional who will study the records of the new borrower.

While debit consolidation loans do look attractive, there is a problem with it in so far as the borrower is concerned. Relief from so many debts at one go may make the borrower complacent, and he or she may start accumulating fresh debits, which may become truly unmanageable. Therefore, a borrower should exercise some control in negotiating and contracting fresh debts. Borrowers should also watch out for any loan closing charges, which are another way of collecting higher interest rates. Going through any loan companies may prove to be expensive, so the borrower needs to do the homework.

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