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

Debt consolidation loans

Having an abundance of debt and owing many creditors is extremely stressful. The long-term expense of making interest payments on high interest rate credit card and loan balances is also not the best approach to a successful financial future. As average credit card balances have soared and as consumers are faced with the reality of managing growing interest payment, the benefit of debt consolidation loans has become clearer.

Debt consolidation loans are loans that offer consumers the ability to reduce the number of creditors owed, cut the amount of interest in loan repayments, and make the debt repayment process more efficient. The consolidation loans often take the form of second charges on a home or a personal loan. By securing a loan with the leverage of your home as security, you can generally get a better credit rate from the bank. Having collateral property secured by debt gives the lender recourse in the event of non-repayment of debt. This makes the lender more flexible in rates and terms.

The result of a debt consolidation through a secured or non-secured loan is that one loan of a larger amount is used to pay off some, most, or all of your creditors that you have higher interest arrangements with. Ideally, this significantly brings down the average interest rate you pay on the balance owed. Lowering your interest rate can reduce your monthly loan payments and increase the amount of payments allocated toward principle repayment. This leads to more easily managed monthly budgets, or perhaps a more efficient repayment of debt.

Debt consolidation loans are usually spread out over the course of years, depending on the type of loan, the lender, and the balance. The more spread out the loan repayment, the less is required for each monthly payment. However, if the goal of a debt consolidation is to lower interest payments and make the loan repayment more efficient, you may opt for a shorter repayment timeframe with a faster repayment of your principle balances.

As mentioned, there is a lot of stress involved when people owe money to many creditors. It is harder to work with creditors for specialized situations when there are several to deal with. Plus, keeping up with all of your monthly payments and getting the payments in on time is difficult if you have several banks and credit card companies that you owe money to.

It is important to consider the up front costs of obtaining debt consolidation loans. There are usually loan application and other fees charged for the acquisition of a new loan. Second charges against your home may also come with other loan fees. To consider the benefits of getting a new loan, you must figure out how long it takes to make back the money invested in acquiring the new loan. The higher your debt and the more creditors you owe, the more sensible a new consolidation loan becomes. Do keep in mind that the loan balance does not disappear; it just takes on a new form. Debt consolidation is not a substitute for proper money management and credit responsibility.

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

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.

Debt consolidation loans

With many people struggling to make ends meet during the current economic recession, personal debt can too easily get out of hand. Debt consolidation loans are designed for people beginning to find their debts slipping out of control and restore an easier and cheaper repayment regime in order to manage their debts once again.

Credit cards, in particular, can quite easily see an escalating amount outstanding, especially if you can only afford to make the minimum repayment each month. Not only does this extend the period over which you will be repaying the credit, but still more interest is added to that outstanding balance each month. To make matters still worse, the rate of interest applied to credit card balances represents one of the most expensive ways of borrowing money, with rates even higher than those on any unsecured personal loans you might also have.

Debt consolidation loans allow the borrower to roll up all such outstanding debt by providing one loan large enough to clear the various loans and credit that are attracting high rates of interest. Not only will the new loan aim to offer a more realistic rate of interest, but it can be spread over a longer repayment period, thus reducing the total monthly commitment. This can make the repayment of all the borrowing and credit considerably more easy and there is only the single repayment to be made each month, rather than having to remember the various repayment dates for the previous collection of assorted loans and credit.

Just what the rate of interest is offered on debt consolidation loans will of course depend on your personal circumstances, how much you can afford to pay each month (and therefore the repayment term), the size of the consolidation loan needed and – crucially – whether or not you are in a position to offer any security against the loan. Homeowners, for example, will be in an especially strong position to negotiate an attractive rate of interest, since the equity in their home can be used to secure the new loan over anything from one to 25 years. As with any borrowing, your credit rating and history will be scrutinised by the lender, with the most attractive rates of interest being granted to those with the best credit score.

Debt consolidation loans, therefore, can extend an extremely useful helping hand to those who are beginning to experience difficulties in managing their debts thanks to the immediate reduction in the total monthly repayments that are likely to be needed. Nevertheless, it should be remembered that one of the principal ways in which the level of repayments were reduced was probably by extending the repayment period. Over the full course of the consolidation loan, therefore, it is possible that the borrower will have ended up actually paying more interest. Some people might find this a small price to pay, however, for the benefit of taking control over their personal finances once again and the alternative of hopelessly escalating debt.

Where debt consolidation loans have been secured against the borrower’s own home, of course, it is vital to appreciate that defaulting on the loan repayments could put the home itself at risk.