Debt consolidation

2006-12-01T06:09:00.000-08:00

Debt Consolidation Advice

Debt consolidation can seem like an attractive option for many people. Having many payments to make every month can get confusing and difficult to keep track of. The inevitable problem is that payments can be missed and you will incur charges as a result increasing your debt further.

What is a debt consolidation loan?
A debt consolidation loan is where you pay off your existing debts and transfer them all onto one loan. This means you will only have one monthly payment to make instead of the multiple ones that you currently make. You are still required to pay the money back, but now all the money owed is with one lender.

When is debt consolidation a good idea?
If you have debt on high interest accounts then you may be able to reduce the interest that you pay by taking out a loan. This will depend on your personal circumstances and how much of a risk the lender perceives you to be. Always compare the APR of the loan that you are taking out against the debts that you currently have. If the APR is lower on any of your current debts then you should leave them where they are as you will be paying less interest.

Credit and store cards are good examples of where you can often reduce the APR that you pay by consolidating with a loan. If you have debt of around £5000 on a credit card and are only paying the minimum, it can take anything up to 20 years to pay it off. With a loan you could pay the same amount and be cleared in 5 years, saving yourself a fortune in the process.

When is debt consolidation not a good idea?-
Debt consolidation loans are not for everyone. If you have not brought your spending under control, you should definitely not look at taking on more credit. The last thing you want to do is consolidate your credit and store card loans only for you to load them back up again with more debt. If you do this you will end up in more trouble than when you started the process.

If you have a particularly bad credit rating, have been refused loans elsewhere or have CCJ’s (county court judgements) then a debt consolidation loan will probably not be for you. Some companies will still want to take your debt on, but the APR could be so high that you end up paying far more interest in the long run. Companies will make a debt consolidation loan seem attractive by offering you lower monthly payments than the sum of your current payments to your multiple creditors. You may pay less per month, but will pay a lot more in the long run.