When you hear the word “debt consolidation,” what is the first thing that comes into your mind? From word debt itself, you may think of it as something that is easy to get into but difficult to get out of. Before we give the definition of debt consolidation, let us discuss first how a person gets into debt. We simply can say that it is a way of life. Governments, multinational corporations, small businesses, families, and individuals have all come to accept debt as normal.
Pride often creates debt, and debt creates strain. Strain leads to other difficulties. So how does one live in a world that is debt oriented and, at the same time, stay out of debt? Credit cards can be easily acquired. Over the spectrum from loan sharks to respectable banking institutions, there are millions of successful, aggressive persons who are in the business of selling Money.
Many formulas exist to define an acceptable ratio of debt to income. But these vary so much that many have little meaning. For instance, some economists feel that a family may comfortably allocate 30% of gross income to pay for shelter. This is for mortgage payments or rent. However, this formula may not be feasible for the very poor. So, general formulas are often too vague. The whole problem of debt control is better considered on a personal level.
Debt management is the key to a positive outlook on debts. First, you should establish a working relationship with a reputable bank. Second, you must know how to pay off your debts in some organized way. For example, a bank may suggest a “debt consolidation” loan.
The word “debt” means the amount of money or something of value that is borrowed from a person referred to as a debtor. Usually, a debt that is borrowed carries some type of penalty along with the payback such as an interest, or service. On the other hand, “consolidation” means the combining of separate companies, functional areas, or product lines, into a single one. It differs from a merger, in that a new entity is created in the consolidation.
Therefore, “debt consolidation” is the process of bringing all debts together and then paying them through a single loan, or simply replacing multiple loans with a single loan. It is a strategy often used by consumers to better manage their debt problems. Instead of paying off several separate bills each month, a consumer consolidates his debts with a financial institution to arrange for one lower monthly payment extending over a period of time.