If your personal finances are blighted by high consumer debt, consolidation could be the answer.
There are very few people who live an entirely debt-free life. Today, in addition to mortgage debt, people borrow on credit cards, buy products on finance, have large overdrafts and take out other types of loan to help their financial situation.
However, mounting personal debt can sometimes spiral out of control leaving borrowers stressed, worried and seriously out of pocket. If that scenario sounds familiar, debt consolidation could be the answer. Here’s our quick primer in debt consolidation loans, for those considering them as a way to take back control of their finances.
What is a debt consolidation loan?
A debt consolidation loan is a loan used to pay off a number of other debts in one fell swoop. By merging together numerous outstanding debts, borrowers can sometimes save on their monthly repayments. Rather than owing money to many different lenders over different timeframes and at numerous interest rates, a good debt consolidation loan ties all debts together as one more manageable, more affordable loan.
What is the difference between secured and unsecured debt consolidation?
Like many other loans on the market, debt consolidation loans broadly fall into two categories – unsecured and secured. If you take out an unsecured debt consolidation loan and fall behind on repayments, the lender has no claim on your financial assets. However, a secured debt consolidation loan allows the lender to use your assets (usually property) as security if you lapse on repayments.
This type of consolidation loan is sometimes also known as a homeowner loan, and it’s vital to remember that not repaying it could put your home at risk. Those who have particularly bad credit or who owe a substantial amount of money are more likely to be offered a secured consolidation loan.
What are the benefits of a debt consolidation loan?
If you’re struggling to pay off a wide range of different types of debt, a debt consolidation loan can be an excellent way to take back control. Combining all your payments into a single monthly payment could bring real peace of mind. The right debt consolidation loan could save you money every month by cutting down the overall amount of interest you pay on what you owe. Additionally, consolidating debts could mean you get out of debt more quickly.
Are there any risks?
The main risk is that the wrong consolidation loan could actually increase your overall repayments. Choosing a consolidation loan is only a sensible option if it reduces the total amount of interest you’re paying across your debts in the long run. It’s also important to make sure that the fees charged by lenders for early repayment of the debts you’re consolidating don’t in turn make consolidating a more expensive choice.
How do I know if it’s right for me?
To know whether a consolidation loan is the right route you need to do your sums. Work out exactly how much your current debt will cost you to pay off. Then calculate how much it will cost you to pay off the consolidation loan in total over the full life of the loan. If the consolidation loan works out cheaper, it’s a good option.
For a great number of people struggling with personal debt, a debt consolidation loan is a great solution. However, as with any financial decision, it’s important to look before you leap by doing your research, and looking honestly at how you could better manage your money.