Thinking of taking out a debt consolidation loan? Read this first…
Have you built up a few different debts? You’re not alone! Perhaps you have a couple of credit cards, maybe a store card or two, a personal loan, or some unpaid bills that are weighing on your mind. It’s surprisingly easy to build up debts and find yourself juggling payments to different creditors. It can all be a bit of a headache, so it’s no surprise that the idea of consolidating your debts into one, easy to manage loan is a tempting one. But are debt consolidation loans always the best way to go?
What is a debt consolidation loan?
The purpose of a debt consolidation loan is to pay off your outstanding debts and transfer them all to one manageable monthly loan repayment. The total of your debts remains the same, but it might be possible for your monthly repayments to be reduced or your interest rates lowered.
Debt consolidation loans can be unsecured or secured. Unsecured loans mean the lender has no rights to your assets, such as your home, if you miss a repayment. A secured loan, often called a homeowner loan, is secured against your property. This means if you miss repayments, you could be at risk of losing your home. Unsecured loans are less risky, but harder to qualify for.
The benefits to taking out a debt consolidation loan are:
• You’re less likely to forget or miss a payment when there’s only one to make, so your credit rating is likely to improve.
• You can reduce your monthly payments by spreading your repayments over a longer period.
• You can often get a lower rate of interest than the astronomical rates charged by credit cards and store cards.
However, taking out a debt consolidation loan is only a good idea if you can get a loan which offers you these benefits. You want to be in a position where you are paying less interest on the same amount of debt, at a manageable repayment rate you’ll be able to keep up until the loan is repaid. Taking on higher repayments, a larger debt total, or a higher rate of interest will worsen, rather than improve, your situation.
Some of the potential downsides can be:
• You end up taking a lot longer than necessary to repay your debts.
• Your house is at risk with a secured loan.
• Your new monthly repayments are unmanageable.
• You accumulate new debt on top of your consolidated debt, making your overall situation worse.
• You are charged high arrangement fees from the debt consolidation loan provider.
If you find yourself in a stressful debt situation, the best thing to do is seek some free, professional debt advice before taking out a debt consolidation loan. You may be able to reduce your outgoings or arrange a more manageable repayment structure with your existing creditors. Transferring some of your debt to a 0% credit card, or a personal loan may make more sense for you than taking out a debt consolidation loan.
Debt consolidation loans are not a magic fix. If you’ve taken advice and decided they’re your best option, make sure you shop around and find the best possible deal for you!