A Brief Guide to Debt Consolidation Loans

Debt Consolidation Loans are marketed as financial products that will allow you to ‘bundle’ all your debts into a single loan, leaving you with a less complex debt burden and lower payments. This is the theory at least and it is true that many people enjoy exactly these benefits after taking out debt consolidation loans. It is important to note however that debt consolidation loans can sometimes be quite inappropriate as a means of debt management. It would therefore be a very good idea to investigate all your option before ‘putting pen to paper’ and signing up for one. The purpose of this article is to look at the possible advantages and disadvantages of debt consolidation loans as well as to point out some common pitfalls.

Advantages of Debt Consolidation Loans

The main advantage of debt consolidation loans is that they can reduce the amount that you spend every month on debt servicing. They will also help you to maintain an intact credit rating as they make negotiations about restructuring your debt with your existing lenders unnecessary.

These kinds of loans are therefore a good option if you are convinced that you have financial self control and are looking for a ‘once and for all’ option to help you pay off your debt.

Disadvantages of Debt Consolidation Loans

Some debt consolidation loans are new unsecured loans created from the consolidation of other unsecured loans. However the majority of such loans are actually secured against an asset (most commonly a home). This kind of debt consolidation could therefore put your home at risk if you do not keep up regular payments.

The fact that your debt is ‘stretched’ over a longer period, coupled with high interest rates, means that the final amount that you will be asked to pay will be very high. The bottom line is that it is quite possible that you will take longer to pay off your debt and that you will have to pay more to do so.

Getting the Most from a Debt Consolidation Loan

If you decide that you want to consolidate your debts, you would do well to keep the following in mind:

• Many debt consolidation companies make a lot of money on selling additional insurance to their clients. It would however in almost all cases be better to arrange your own insurance as you will very likely get better cover at lower rates if you do.
• It is unfortunately the case that there have been quite a few unscrupulous operators in the debt consolidation field in the past. It would therefore be worth your while to do a bit of homework on the companies that you are thinking of dealing with.
• Some companies use low introductory rates in order to mask the true cost of their products. It is therefore advisable to do your own calculations on how much interest you will pay over the life of the loan.
• It would in many cases be better to secure a ‘regular’ bank loan as a means to consolidate your debt rather than working through a specialist debt consolidation lender. It might therefore be a good idea to discuss your situation with your bank manager before making a final decision on a consolidation loan.

Managing Your Loan

Your sole objective in taking out a consolidated loan should be to use it as a means to get out of debt. Treating it like just another ‘line of credit’ and adding to the loan amount is a very bad idea, especially since you could put your home at risk by taking out secured debt at relatively expensive rates. Do your best therefore to ‘always put in and never take out’ once you have secured the loan.

Summary:

• Debt Consolidation Loans are a means of ‘bundling’ debt together in one package
• It can be used successfully as debt management strategy if managed correctly
• The main disadvantages are high cost and the risk to assets (e.g. the borrowers’ home)
• Thorough research is needed before making a final decision on taking out a debt consolidation loan