Debt consolidation is the process whereby a single, larger loan is taken out to pay off multiple smaller debts. This can either be through secured borrowing against an asset, such as a property, or through further unsecured borrowing (which tends to be more expensive given that the lender has no security). The rationale behind consolidating debts is to secure a lower rate of interest, so that the borrower has only one, lower monthly repayment to make.
However, if you are considering consolidating your debts, you need to make sure that you are comfortable, not only with the monthly repayments, but also with the repayment term (which will typically be longer than your existing credit commitments are scheduled to run for) and the total amount that you’ll be paying back (which will be more than the amount you currently owe). Generally, consolidation loans should only be considered by people with good credit histories and a relatively high proportion of high interest debt (such as store and credit cards).
Debt consolidation is rarely the solution to a serious debt problem as in practice, the borrower is simply increasing the total amount that they’ll be required to pay back. If you do consolidate then it’s important not to give in to temptation and start building up new debts while you’re paying off your old ones. Cut up your credit cards!
The advantages of consolidation loans
- Your debt will be in one place, so you can keep track more easily.
- By repaying over a longer period, your monthly payments will come down.
- Your home is not at risk if you can keep up payments.
- Friends, colleagues and family don’t have to know about it.
The disadvantages of consolidation loans
- A longer loan, even on better terms, can mean you pay more in the end.
- For larger debts, the new repayments may still be unaffordable.
- In the current financial climate, with unsecured and secured loan criteria being tightened, it’s very difficult to get a consolidation loan at a reasonable rate of interest.
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