A Way to End the Downward Debt Spiral: Debt Consolidation Loans

People who are heavily in debt often describe their situation as akin to ‘drowning’. This does not only have to do with sinking under the actual sums involved but also with trying to keep track of what they owe to whom and when! The fact is that that ‘loans breed loans’ as people try to use new lines of credit in order to pay off existing ones. One way to break free from this vicious circle is to take out a Debt Consolidation Loan.

A debt consolidation loan is simply a loan that allows you to pay off all of your existing debts, leaving you with a single monthly repayment. For example, if John holds three credit cards, 2 two store cards and an overdraft he can use a debt consolidation loan to turn his six repayments into one. There are many advantages to this approach. Some of them include:

• A possible reduction in the total monthly amount spent on debt servicing
• Better interest rates, especially if the debt being consolidated is held on credit cards.
• The convenience of having one monthly repayment instead of many.
• The ability to reduce your monthly repayments without damaging your credit rating.
• The ability to budget with more accuracy as loans are issued for a fixed term with fixed (depending on the interest rate) repayment amounts.

Although debt consolidation loans can be a very important tool in reducing overall indebtedness it should be noted that it is not a totally risk free option. Some of the things to keep in mind are:

• Debt consolidation loans are often secured against the homes of borrowers. Defaulting on a debt consolidation loan could therefore have a serious negative impact on the security and wellbeing of your family.
• If your debt is already totally out of control it is unlikely that use of a debt consolidation loan on its own will be sufficient to get you away from the brink. In such cases it might be a better option to negotiate an Individual Voluntary Arrangement (IVA)
• The fact that debt consolidation loans are measures of early intervention rather than ‘solutions of last resort’ is further underlined by the fact that a damaged credit rating could make obtaining such a loan very difficult and expensive.
• It is often the case that your existing lenders will charge you early repayment penalties and various other fees if you pay off your debts with them before the loan terms have run their courses. It would be worth your while to find out what these fees will be (if applicable).

The great value of debt consolidation loans lie in the fact that they can be very effective in preventing an escalating problem from spinning out of control. As such they are the perfect products for people determined to make a fresh financial start before things get out of hand.

Summary:

• Debt Consolidation Loans is a way to combine all existing debts into one loan
• The benefits of debt consolidation loans include: possible lower monthly repayments, lower interest rate and simpler financial management
• It could sometimes be unwise to take up such a loan. This is especially true in cases where debt levels have reached a ‘point of no return’.
• Debt consolidation loans work best when they are used for early intervention

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