Debt Consolidation Loan Help
Introduction
The concept of a debt consolidation loan is simple; you take out a loan for an amount large enough to pay off all your existing borrowing – on credit cards, personal loans, etc. – including the interest on that borrowing, and you are left with a single, affordable, monthly repayment to a single creditor. This is all well and good if you can afford to make the repayments and are adept at controlling your spending, but borrowing money to pay off existing debt is seldom a good idea – and may make matters worse, not better – if your personal finances are unstable, or you lack self-control. For example, a lender may insist that a debt consolidation loan is secured against your home, which places it at risk if you do not keep up repayments on the loan.
Debt Consolidation Loan Pros & Cons
If you have multiple debts scattered around on credit cards, store cards, personal loans, etc. – some of which are subject to a high APR, or "Annual Percentage Rate" – a debt consolidation loan can provide a method of simplifying your monthly outgoings, and possibly of reducing those outgoings without adversely affecting your credit rating. It may be that you are finding it difficult to keep up repayments on multiple, separate debts, in which case a debt consolidation loan can spread the debt over a longer period of time, reducing the immediate pressure on your finances. This may of course mean that you are paying back more in interest charges in the long-term, but, if you are consolidating high APR debts – store and credit cards being the worst offenders in this category – you may find that even the extra interest accrued over a longer repayment period is offset by a lower interest rate in the first place.
In either case, a debt consolidation loan can reduce the amount of pressure you experience day-to-day from your creditors, and you have of course, one creditor to deal with. You should however, be very careful in you calculation of your income and expenditure – including a certain amount set aside as a contingency, for use in emergencies – so that you are absolutely certain that you can afford the repayments on a debt consolidation loan, not only in the immediate future, but for the duration of the loan agreement. Remember too, that in paying off any existing debts, lenders may apply early redemption charges or penalties to any outstanding balances, so make sure that you base your calculations on official settlement figures, rather than just the balances themselves. Failure to do so may mean that you borrow insufficient funds to pay off all your existing debts in full.
On the other hand, it is also a good idea not to borrow more than you actually need. Lenders may be keen to offer you more competitive interest rates if you borrow a larger amount, but while the temptation of a well-deserved holiday, or some other luxury item may be almost irresistible, do remember that the money does need to be repaid, with interest. Similarly, if you are consolidating credit card debt, close your credit card account – or at least cut up your existing credit card – so that the temptation of a large amount of available credit, and a zero balance does not start you on a spiral of increasingly unmanageable debt once again.
Certainly shop around for the most competitive deal in terms of APR, but remember that you may incur additional costs in the administration of a debt consolidation loan, and may end up repaying more in the long-term, depending upon the exact nature of your existing debt. Be careful too, if interest on your existing debts was accrued at the start of any credit agreement because, if so, you may end up paying interest on your existing debt and on the debt consolidation loan which replaces it.
Having just a single creditor to deal with is ideal, from the point of view of managing your finances, but it does limit your room for manoeuvre if you run into difficulties with repayments further into the term of the loan. Above all, however, you need to make sure that your lender is reputable, and to this end it may be worth your while consulting a professional debt counsellor, or IFA ("Independent Financial Advisor"). He or she will be able to provide you with impartial expert advice on the best – and the worst – lenders available, and may indeed already have relationships with several reputable lenders.