Consolidate Debt Enjoy Economy Of Scale To Save Money

Economy of scale is a term known to most of us. It means that as production gets bigger each product gets cheaper. But not many know that economy of scales also work for financial tools and also for debt that most consumer carry.

Debt is actually a product like any other product. Debt is the act of borrowing money from a bank or another financial institution. In return to borrowing money the institution collects some interest and at the end of the debt term collect back the principle.

So debt is just a product. The product is money and the product price is the interest on the money. Although the debt market is highly regulated there is a large variety to the product price. The debt product price in fact changes not just based on who is lending the money but also based on who is borrowing and for what purpose. Who is borrowing determines the risk in lending the money. The higher the risk the higher the price.

The purpose of the money also reflects risk. Lending money to buy a new house is different than lending money to go on a vacation. If you lend money to buy a house and cannot return the money the lender can always take control of the house or in other words the lender has a tangible asset to hold. On the other hand if the money is used for travel and the borrower cannot pay back there is no asset to hold.

Debt is a product and like any other product the more money that you borrow the better the position you are to negotiate a lower price or in other words a lower interest. Consumers usually have debt from a few lenders. One or more debts on their house debt on their car and maybe a few more debts on their credit cards. Each lender charges a different price for each such debt.

Debt consolidation is the consumer way to enjoy the benefits of economy of scale. In other words economy of scales when it comes to debt means trying to consolidate all the different debt sources to one lender for the whole total sum of the money borrowed.

There are many ways to consolidate debt but in essence they are based on the same concept. A new or existing lender will borrow the total sum of all the consolidated debts. The proceeds of that borrowing would be used to pay off all the other lenders. The end result is consolidated debt having only one lender. The advantages are many. It is much easier to manage payments to one lender but more importantly it is much easier to negotiate better terms on the loan and as a result save a significant amount of money.

Many consumers are not aware of the option to consolidate debt and as a result losing money. Many lenders have no incentive to inform their customers about the option to consolidate as they prefer to continue selling the high priced debt product. One problem that can prevent consumers from consolidating debt is lenders putting prepayment penalty clauses in other words if you are trying to pay your debt before the end of the debt term you will have to pay a fine. If the fine is more than the consolidation saving it makes consolidating economical anymore.