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Debt Consolidation

Debt consolidation loans enable you to borrow a large lump sum in order to pay back your creditors. You are then left with only one creditor and a monthly repayment that is often a lot lower than what you were paying before. Debt consolidation loans, however, often result in you having to make repayments for a much longer period.

Before taking out a debt consolidation loan, you should take the following points in to consideration:

• Obtain a settlement figure from your current lenders rather than a balance. This ensures that you are borrowing enough to repay all your debts in full.
• Make out a budget beforehand. You should factor in exactly how much you owe, as well as the cost of your debt consolidation loan. You should then make out a realistic income and expenditure list to make sure you can afford the new payments. Be sure to include a sum for emergencies and contingencies. If the figures do not add up, then you should consider a debt management plan instead of a debt consolidation loan.

 

Types of loan available

Debt consolidation loans can operate in various different ways. You may find, for example, that you are able to obtain an unsecured consolidation loan from your bank. The advantage to this is that your property is not secured against the loan, and you will thus not be in danger of losing it should you fail to meet the agreement’s terms and conditions. The drawback to such a loan is that the interest rate is probably going to be a lot higher than it would on a secured loan.

A lot of companies are now offering secured loans at competitive rates. Such a loan may effectively reduce your monthly outgoings. But you should keep in mind that your home will be secured against the loan. If you do not repay it, then repossession proceedings might be undertaken.

It may be possible for you to remortgage your property as a way of freeing up some of your home equity. The advantage to this is that you will be paying a much lower rate of interest, which will probably be the same as your mortgage rate. The drawbacks to this include the fact that you will be paying a lot more over time, despite the lowered interest rate, because you will be paying back the loan over the same period as your mortgage. What is more, should you default on your payments, your home will be at risk.

Pros of a debt consolidation loan

 

• You may be able to reduce your monthly payments.
• You can reduce some of the pressure you may be under from your creditors.
• You will have only one creditor to deal with.

Cons of a debt consolidation loan

• You might pay more over a longer period.
• You might incur additional costs for setting up the loan.
• If secured, your property may be at risk.
• You will be left with only one creditor - this can make it difficult to negotiate, should you have further problems in repaying your loan.
• If the loans you are consolidating have all the interest added at the start, you may in effect be paying interest twice.