Several of you may already know, an unsecured consolidation loan gathers your entire debts into one, single loan. So, instead of several debts, you can have only one loan to think about, and normally, it has a lower interest rate. This is great because it frees you from dealing with different people, companies, collectors, and due dates.
Nevertheless, your previous creditors must still be paid. The debts were merely consolidated, not extinguished. How your previous creditors are paid is dealt with differently by different debt consolidation companies. Some companies will directly pay all your previous creditors. This way, you do not have to deal with your old debts. Just give your name, the name of your creditors, account numbers, and other relevant information to the company offering you an unsecured consolidation loan, and youre good to go.
Other companies take a different path. They would just give you the money after the consolidated amount has been determined, and you will be the one to pay off all your previous loans. In both situations, your old creditors will be paid in full. Whats left is your obligation to the company that offered you the unsecured consolidation loan. But which of the two options is best for you?
Many people in the field of personal finance would recommend the first option. Since the debt consolidation company directly pays your old creditors, you will not have the chance to get a hold of the loan check. Because of this, they say, you will not have the chance to spend that check on something else instead of paying your creditors.
That is certainly a valid argument, but that option even offers some problems. What if your debt consolidation company fails to pay your old debts on time? What if they fail to pay your previous debts at all? You will end up with two huge debts. In addition, your old creditors could also add penalties and late payment fees to your account.
If you take the loan check and pay your previous creditors yourself, it is true that you might be tempted to spend it on other items. However, this is something you have control over. You can choose to go to your old creditors, and be completed with it. The solvency, intent, management and reputation of any company, on the other hand, are totally beyond your control.
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