The Pros and Cons of debt consolidation
Everyone’s personal circumstances are unique, but many people will help relieve their debt problems by consolidating their debts into a single loan on more favourable terms. One of the advantages of
debt consolidation over multiple borrowing is that interest rates can be lower, and this is often especially the case for secured loans used to pay off credit card and store card borrowing for example.
Interest rates are often lower on secured loans, because there is a reduced risk of exposure to bad debt for the lender. Also monthly payments will tend to be lower as the loan is usually extended over a longer period.
Another advantage is that many people will find it easier to manage a single loan, rather than having to deal with multiple creditors.
There will be costs involved with taking out a debt consolidation loan, including having to pay an early settlement charge on some of your existing loans, and any fees or commissions that might be paid to your broker. For these reasons your debt will increase.
Although monthly repayments on a debt consolidation loan will usually be lower, you will pay more for your borrowing overall, because the loan is spread over a longer period. This may still bring benefits if you are finding that you have little money left in your account after you have finished paying all of your monthly bills. In any case, you should look carefully at the duration of a consolidation loan and the total amount you will have to repay, to make sure that the loan makes financial sense for you.
Another aspect of debt consolidation you should be aware of is that you will be in effect cancelling your existing loan agreements with your previous creditors and signing a new, single agreement. So as well as changing the interest rate you will be paying in the future, and the period of the loan, you will also likely be changing the terms which apply. The new agreement might affect any early settlement charge, for example, and you should read the new terms and conditions carefully.
If your personal circumstances change unexpectedly, for instance if you become ill or lose our job, or if there is a change in the financial environment, then you could have problems paying back the loan.
For the case of debt consolidation taken out with a secured loan, the consequences can be more serious than if you had taken out numerous unsecured loans. For this reason, people taking out a debt consolidation by means of a secured loan need to consider a payment plan protection scheme. Always question what the payment protection plan covers and make sure that it meets your needs. There are many plans that are nothing more than a rip-off.
Think carefully about consolidating credit card balances into a single credit card rather than a secured loan. Sometimes a credit card lender will offer to consolidate existing credit card debts into a single card with a lower interest rate.
It is important to be clear on the details, especially for any time-limited offers, and any limitations on the use of the new credit card. You should certainly read the fine print carefully and preferably get independent, professional debt advice before consolidating your credit card debts into a single card.
Always be wary of advice that you see from so called TV pundits, to keep switching your debts between credit cards. That is all fair and good in the short term, but eventually you have to start paying it all back. Nothing is free for ever. The sooner you start paying your debt off, the better.
Debt consolidation can bring benefits to many people particularly those who would like to make a single, reduced monthly repayment, rather than deal with multiple creditors. However, it is important to be aware of all the advantages and disadvantages of a secured consolidation loan. It cannot be stressed enough that you should seek professional advice and read the terms of any agreement carefully, before deciding to consolidate.
If you would like more information,
ring Debtsolver now on Telephone 08000 434 336 (Free for UK residents only).
