Debt Consolidation - Will a Consolidation Loan Save Me Money?
Published: 17 November 2008
The answer to this question depends on the characteristics, particularly the interest rate and the repayment term of the consolidation loan that you choose in the first place. It also depends on your own self-discipline in managing your personal finances in such a way as to allow a consolidation loan to save you money in the long-term. The idea behind a consolidation loan is that instead of making multiple monthly repayments at high interest rates on credit cards, loans and other credit agreements, you take out a further loan and pay off all your existing debts of this type. What you are left with in theory, at least, is a single, affordable monthly repayment. To be effective, however, the interest charged on a consolidation loan must be lower than that on your existing debts and repayments must be set at a realistic level. It may be, of course, that in order to afford monthly repayments, you need to commit to a longer repayment term. This may actually cost you more rather than less in the long-term, but this arrangement will at least free you from day-to-day financial pressure and harassment from creditors.
Consolidation Loan Features, Benefits & Considerations
There are a number of important considerations when choosing a consolidation loan. The first and most obvious of these is the APR, or "Annual Percentage Rate". Lenders are required by law to disclose the APR of any loan agreement as this takes into account the total amount financed, the interest rate, any charges or fees applied to a loan account and the amount and timing of repayments. In other words, the APR represents the true cost of borrowing over a year and is a useful tool for comparing one consolidation loan deal with another.
The APR that you are actually charged may depend on your credit history. If you have had arrears or defaults, previous credit agreements, CCJs ("County Court Judgements") etc. against you, you are perceived as a higher risk than a borrower with a satisfactory credit history. This is whether or not you are a homeowner and, of course, the amount of money you need to borrow over what period. The advantage of being a homeowner is that you can "secure" a consolidation loan against the equity which is the difference between the market value and any claims against the property in your home. As a result, this may mean that you can, for example, borrow more money over a longer period of time.
Many lenders offer lower interest rates if you borrow more money, but do not be tempted to borrow more than you actually need to cover your existing debts. The more you borrow, the more you will have to pay back, with interest. It may be useful to find a consolidation loan with a flexible repayment structure so that if you receive a lump sum from say an inheritance or a lottery win, you can use it to pay off the loan without penalty for early settlement. This applies equally if you find suddenly that you are able to make larger monthly repayments because of a promotion or change of job,for example.
One fixed monthly repayment making for easier budgeting are both very well, but you must also make some lifestyle changes to prevent you from starting spending all over again once your consolidation loan is in place. Credit cards, in particular, with limits of thousands of pounds and zero balances, may suggest that you have a wealth of untapped funds ripe for spending on a well-deserved holiday or other luxury items, when in fact you do not. Take a step back and remember how your credit problems occurred in the first place and how a consolidation loan is supposed to make them better not worse.
You should consider carefully whether you actually need to purchase PPI, or "Payment Protection Insurance" alongside your loan and if you do, whether you need to purchase it from your consolidation loan provider. Properly sold, PPI is intended to provide worthwhile cover for accident, illness, etc. that may affect your ability to keep up monthly repayments on a loan. PPI is, however, expensive when bought with a loan. It may be available for a fraction of the cost elsewhere and you may never need it with the policy proposed not necessarily being suitable for your individual needs. If you do need this form of insurance, make sure that your policy covers all eventualities for loss of earnings, etc., and shop around for the most competitively priced policy.
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