A Guide to Debt Consolidation
If you are struggling with a mountain of debt, it can be hard to see clearly and make decisions about how to manage better. One way of taking control of your debts and making the loan repayments more affordable is to consider debt consolidation.
How does debt consolidation work?
It can be confusing to have many different types of debts and loans with different interest rates, due dates, outstanding amounts, and lenders. To reduce this confusion, it can be a good idea to combine all your debts into one simple debt ideally with a lower interest rate.
The main purpose of debt consolidation is to unite all your outstanding debts into a single debt and find a deal where interest rates are much lower than your existing one. Many debtors can feel more encouraged to find a real solution to their debt problems once they have successfully managed to consolidate debt. Debt consolidation allows them to feel more in control of their situation and can be the first step towards being debt-free.
What debt consolidation loan options are available?
Before you apply for a debt consolidation loan, make sure you have the following:
- sufficient collateral
- a good credit history
- a strong debt-to-income ratio
A number of different financial products can be used to consolidate debt including:
- Secured loans – this type of loan allows you to transfer a costly unsecured debt onto a secured loan with a more favorable interest rate. You can borrow more funds from a lender by using your property or other assets, such as a car or a piece of art, as collateral. Lenders prefer to lend money to people with assets.
- Unsecured loans - this type of loan allows you to approach a lender for a sum of money to pay off all other debts. As the loan is unsecured, you do not risk your home if you fail to make repayments.
- Re-mortgaging a property - You approach a new lender to borrow more money, based on the increasing equity in your house. This enables you to move costly unsecured debt onto a mortgage deal with more reasonable interest rates.
Ask yourself the following questions when shopping for debt consolidation loans:
- Which kind of lender appeals to you?
- What are the terms of the loan?
- How do the monthly payments work?
- Are you fully aware of any penalties or extra charges?
- What is the interest rate?
- Is it fixed or variable?
What are the benefits of debt consolidation?
- Reduced interest rates
- Reduced monthly repayments
- Liaising with a single creditor
What are the disadvantages of debt consolidation?
- Additional expenses incurred for settling an existing debt, for instance redemption penalties
- Additional arrangement fees incurred for organizing a new consolidated debt
- Extended repayment term
- The real possibility of losing your home if taking out a secured loan to control your consolidated debts
Before you consolidate debt, it may be worth trying other methods such as:
- Openly discussing your needs and problems with your creditors who may support you by offering you helpful solutions
- Approaching free debt counselling services for professional advice and guidance
Even though debt consolidation can offer many debtors a lifeline, it must not be considered a panacea for all debt problems. If used in the right way, debt consolidation and debt consolidation loans can be instrumental in helping you clear your debts. However, if, for example, you have a spending addiction, debt consolidation will not solve your financial problems in the long term.
Debt consolidation loans are ideal if you:
- are currently paying high interest rates and are looking for a more favorable deal
- are looking to lower your monthly payments
- need to free up extra cash for an emergency
Debt consolidation loans may not work if:
- you have previously consolidated your debts
- this new debt consolidation includes previous outstanding debt
- your intention is simply to transfer debts from credit and store cards to enable you to start using those same cards again.
Lastly, a good piece of advice when you consolidate debt is to choose a debt consolidation loan with a fixed interest rate as deals with variable interest rates can easily spiral out of control.
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