Debt consolidation is the process of taking out a loan to pay off one or more debts that you currently have. For example, credit card balances or small loans which you may have taken out or, in many cases, both of these. Debt consolidation is a manageable and often more affordable way to regain control of your finances and reducing the amount of your monthly outgoings into one manageable payment rather than several.
Debt consolidation loans can make a great deal of sense under the right circumstances. There of course many things to consider before deciding to take the route of a debt consolidation loan but overall this may be a sensible solution for people that may have a number of smaller loans that may be starting to get a little out of control. It is always important to try and maintain a good credit score at all times, however, if you have some debts and are at risk of not being able to make the required payments, then a debt consolidation loan will help by consolidating your various loans into one monthly payment.
People who have taken shorter term loans such as payday loans may well be paying an extraordinary amount of interest. What was seemingly a good idea at the time may have turned into something of a nightmare and the sooner the debt can be settled the better. Another expensive debt is credit cards. It is very easy and tempting to use your full borrowing limit on a credit card but getting things back on track is a different matter and requires repaying the amount that you have spent, plus often with considerable interest and this can be very tricky.
Also, there are occasions in life when your personal situations change and you may find that your finances are stretched with other new commitments and you are struggling to manage.
There are two types of Debt Consolidation Loans:
Secured Loans – the amount you borrow is secured against an asset, typically your home. It is important to note that if you miss repayments your home will be at risk.
Unsecured Loans – the loan is not secured against your home or other assets.
Debt consolidation loans can pull together all types of outstanding multiple debts into a simple and manageable monthly payment. No extra charges, no late payment fees, just a single affordable monthly payment. The borrower knows exactly the total amount due each month and the time of the month when payment is due. This makes it much easier to budget accordingly and enables you to make sure that you stay on top of your finances – this is a key advantage with a debt consolidation loan.
Does debt consolidation ruin your credit?
It is important to consider the following disadvantages:
Secured Against Your Home – By taking out a secured loan you are ‘securing’ the debts against your home and if you do not keep up with the monthly payments you could lose your home.
Term – The loan maybe over a longer term than the debt currently has, so therefore it maybe more expensive in the long run
Fees – When taking out a secured loan there are fees to pay to set this up, so you will be creating more debt.
Is it a good idea to get a Debt Consolidation Loan?
Whether consolidating your debt is a good idea or not depends on both your personal financial situation and on the type of debt consolidation being considered. Consolidating debt with a loan could reduce your monthly payments and provide near term relief but a lengthier term could mean paying more in total interest.
Applying for a Debt Consolidation Loan
You will be required to submit the details of all your debts so they can be consolidated into all that you have outstanding. Once the loan is approved, the new lender will get in touch with your original lenders to pay off the old debts. Until you receive a written confirmation from the lender that your original loans are paid off, you should continue with your monthly payments. That way, you will not be at risk of missing a payment. This is a great option if you have a high credit score. You can get the loan with a low-interest rate, which will help you save in the long term.
One element that needs to be considered though is potential early redemption fees – that is the settlement charged on a loan if settled early. It is a relatively easy calculation to work out if these redemption fees outweigh the interest saved by using a debt consolidation loan. This issue does not occur with credit cards and if people have a few high outstanding balances on high interest credit cards then the decision to take out a debt consolidation loan becomes a lot easier. Another element that requires thought is that the overall amount of money you pay could be higher than your existing arrangements depending on the term of the new loan.
Can I get a Debt Consolidation Loan with poor credit?
If you have low average to bad credit (below 660 credit score) you may still qualify for a debt consolidation loan but the interest rate will be high. Many people choose to consolidate debt because of the high-interest rates making it hard to pay down the principal balance.
The main reason people look to take out a debt consolidation loan is to reduce their outgoings, however although you may save money each month possibly the debt may cost you more money over the long term especially if you are extending the terms of existing credit.
This all depends upon your individual situation. Reducing your monthly outgoings with a debt consolidation loan maybe a good idea, but you need to be aware of the risks and that possibly you may pay back more in the end.