Debt Consolidation Loans

Debt consolidation loans are often considered to be the bogeyman of personal finance. Wherever you go, you hear horror stories of people who have been burned by high interest rates, foreclosures and repossessions after turning to consolidation companies in their greatest time of need. However, while it is possible to get stung pretty badly by some unscrupulous companies, consolidating your loans needn’t be the end of the line for your finances.

So, why consolidate? There are several reasons. It’s often done as an attempt to capitalise on introductory offers with a loan company (such as a lower interest rate, rather than the higher rates you might be paying on often-extortionate store and credit cards), to get a fixed rate of interest for your debts, or even just as a means of keeping your bills under control: the now-infamous ‘one simple monthly payment’ that is so often used in advertising campaigns. These are all valid excuses to see about getting a debt consolidation loan, but it’s important to note that it’s not a magic-bullet solution to debt; you might only have one creditor to pay back, but it still needs paying. Additionally, many such loans offer a longer repayment time, meaning that – while you’re paying back less each month – the total amount repayable may be considerably higher.

Similarly, although it is possible to get a debt consolidation loan that merely merges a number of unsecured loans into one unsecured loan, you’ll generally find it’s easier to get a more favourable interest rate should you agree to secure your loan with some form of collateral (usually a house). In this case, the bank or other lending institution can write off a lot of the risk associated with the loan – if you default they can foreclose on your property, and so can recoup much of their losses – and as a result are able to offer you a lower interest rate. Once again, though, it’s important to note that these loans can come with a longer repayment period, and so may cost more in the long run. If you don’t have anything to use as collateral (if, for example, you’re a student, or someone who’s yet to get a foot on the property ladder), it should still be possible to consolidate your debts, but you may end up paying more per month for the privilege.

Debt consolidation isn’t for everyone – and there are some people who may find themselves considerably worse off as a result – but there are much fewer examples of so-called ‘predatory lending’ (that is, when unscrupulous institutions actively seek out people who are near bankruptcy in order to charge them higher prices for what amounts to a riskier loan) than the media would have you believe. The usual rules for finance apply here the same as everywhere else: shop around, make sure you’re getting the best deal, don’t overreach your repayment capacity, and don’t be afraid to talk to a financial advisor if you’re really struggling.

Similarly, don’t feel as though debt consolidation is your only option, especially if you’re worried about credit cards or loan repayments; there are many alternative methods (including the much-lauded ‘debt snowball’) that may be more suited to your personal circumstances. However, debt consolidation loans are a useful tool for a fair percentage of debt holders, and so it’s crucial that you don’t write them off as a result of bad press or unfair media reporting.

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