Creditors are willing to do this for several reasons – one of them being that it maximizes the likelihood of collecting from a debtor.These loans are usually offered by financial institutions, such as banks and credit unions; there are also specialized debt-consolidation service companies.
A parent company buys a majority ownership percentage of a subsidiary company, and a non-controlling interest (NCI) purchases the remainder of the firm.Even so, the interest rates are still typically less than the rates on credit cards. “Typically, the loan has to be paid off in three to five years,” says Harrine Freeman, CEO and owner of H. Freeman Enterprises, a credit repair and credit-counseling service in Bethesda, Md., and author of “How to Get Out of Debt.” These types of loans don’t erase the debt; they simply transfer all your debts to a different lender or type of loan.(In circumstances where you need actual debt relief or don't qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation.Theoretically, any use of one form of financing to pay off other debts is practicing debt consolidation.However, there are specific instruments called debt consolidation loans, offered by creditors as part of a plan to borrowers who have difficulty managing the number or size of their outstanding debts.In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms: a lower interest rate, lower monthly payment or both.
Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt and other types of debt.
If the parent and NCI pay more than the fair market value of the net assets (assets less liabilities), the excess amount is posted a goodwill asset account, and goodwill is moved into an expense account over time.
A consolidation eliminates any transactions between the parent and subsidiary, or between the subsidiary and the NCI.
There are two broad types of debt consolidation loans: secured and unsecured.
Secured loans are backed by an asset of the borrower’s, such as a house or a car, that works as collateral for the loan.
In some cases, the parent buys the entire subsidiary company, which means that no other firm has ownership.