Consolidation loans can help to make your debt more managable but are they the right option for you? We weigh the pros and cons.
By paying off any outstanding balances on existing loans, store or credit cards and overdrafts, debt consolidation loans enable you to condense all of your monthly outgoings into a single payment. Although you will still be responsible for paying the total amount back, you may be able to pay a lower rate of interest and spread the loan over a longer period making your monthly payments more manageable.
This can be particularly advantageous for those who only pay the minimum monthly balance on each of their commitments as paying debts in this way does not reduce the overall amount owed but simply covers interest payments. By condensing your monthly outgoings using a debt consolidation loan, the fixed monthly repayments will include a percentage of the total amount owed as well covering interest payments, resulting in a monthly decrease in the remaining amount.
Another advantage of a debt consolidation loan is that the interest rate applied to the condensed amount is likely to be significantly lower than that charged on store and credit cards. This means that by simply moving the amount you owe to a borrowing facility with a lower interest rate, clearing your debts will be much simpler.
The interest charged on your debt consolidation loan will depend on the amount you need to borrow to clear all other remaining debts (larger amounts tend to attract a lower interest rate) as well as your personal circumstances and credit history (those with a better credit history are likely to receive a lower rate).
Lenders may be more willing to offer a secured debt consolidation loan to those with a poor credit history as this provides a guarantee for their investment. However, although these may be a good option for those who want to condense a large amount of debt, it is important to remember that if you do not keep on top of the repayments your home may be at risk.
You should only condense your existing commitments with a debt consolidation loan if the interest rate charged and the amount you pay each month is likely to fit into your lifestyle and act to reduce the amount you owe at a faster rate. It is important to be aware that by consolidating your debts and agreeing to make repayments over an extended term it is possible that there will be an increase in the total amount of interest that you pay.
Additionally, once a debt consolidation loan has been used to clear outstanding balances on high interest credit cards, it is important to avoid using the cards to make further purchases as this defeats the purposes of consolidating. If you pay off a debt consolidation loan without accruing more debt then your credit rating is likely to improve meaning that you are likely to have access to a greater range of financial products charged at lower interest rates in the future.
If a debt consolidation loan is used appropriately and with awareness that the amount owed will still need to be paid off, then they can be a fantastic way to make monthly repayments more manageable and to gradually reduce the amount you owe until you have cleared all of your debts.
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