Debt consolidation is where you borrow a lump sum of money in order to pay off all (or most) of your existing lenders. It’s something to consider if you are struggling with the repayments to your existing lenders, or you just want to simplify your outgoings. Instead of a number of smaller payments going out on various dates over the course of the month, you would be left with one larger payment to make on the same day each month. Potentially, you could lower your total monthly repayment if you’re able to spread the debt over a longer period of time. You may be able to find a lower interest rate, which in turn can reduce your total debt – this is particularly true if some of your existing debts are high interest agreements, such as payday loans. Keeping up the repayments would also help to boost your credit rating.
Repaying a Debt Consolidation Loan
All of the above sounds pretty good if you have several existing debts and are struggling to organise your finances in order to pay them each month. However, the benefits above are only relevant if you keep up with the full repayment of the debt consolidation loan each month. You have to be certain that a debt consolidation loan is definitely the right option for you. If you take on too much and find yourself unable to pay it each month, you could end up in a worse situation than before. So there are a few things to consider before taking out a debt consolidation loan:
Will the loan be enough to cover all of your debts?
If not, make sure that the repayments on the new loan, plus any repayments from existing debts that won’t be paid off, are manageable for you.
Are any of your current debts close to being paid off?
If any of your existing debts are close to settlement, you may be better off waiting and reassessing your situation once you’ve repaid them in full.
Have any of your existing debts got early repayment charges? Or are there any fees involved with taking out the debt consolidation loan?
If there are fees involved, be sure to calculate them carefully to make sure that they don’t outweigh the benefits of taking out the new loan.
There are two types of debt consolidation loans – secured and unsecured. A secured loan is usually secured against your property if you are a homeowner. The risk with taking a secured loan out is the possibility of losing your home if you fail to keep up with repayments. However, as secured loans are considered less of a risk for lenders, you will generally be able to find better interest rates and also potentially have a better chance of acceptance. An unsecured loan means that none of your assets are at risk if you fail to make the repayments. This in turn means the lender is taking more of a risk, so you will usually need a good credit rating (or have someone to act as guarantor for you if your credit rating is too low to be accepted) and should expect to pay higher interest rates.« Back to Glossary Index