Debt Consolidation Loans

Debt consolidation loans have soared in popularity over recent years. This impartial guide provides some invaluable information for potential applicants to consider.

About debt consolidation loans

We currently live in a society in the UK where there is a growing problem with the increasing levels of debt owed by many individuals. This debt takes on various forms, but usually involves loans, hire purchase agreements, credit cards and mortgages. It is not unusual these days, for someone to find himself or herself in a situation where they have some, or all of these debts to varying degrees. Indeed, many people are faced with spiralling debts and struggle to maintain the monthly payments to their many creditors. Once in this situation, monthly payments are missed, arrears build up on accounts leading to a poor credit rating and the possibility of default notices and county court judgements. In extreme cases, an individual may even lose their home if they have secured debts on it.

Debt consolidation loans allow an individual or couple to pool these various debts into one loan, with just one monthly payment, making it easier to manage their monthly income and expenditure balance. As debt consolidation loans are usually for large amounts of money, certainly by its very nature it would be for more than any individual debt to be cleared, the interest rate payable on the loan is likely to be lower than that of the previous debts, as rates tend to become cheaper for larger loan amounts. Debt consolidation loans are also often taken out for a longer period of time than the original debts. This has the effect of reducing the monthly repayments on the loan as the total amount to be repaid is spread over a longer term. Depending on the amount borrowed, the interest rate payable and the term of the debt consolidation loan, it is possible to significantly reduce an individual's monthly outgoings, perhaps saving them hundreds of pounds per month in repayments. Even if someone has got into the position where they have a poor credit rating, it may still be possible to take out a debt consolidation loan, although the interest rate would be reflected in the particular circumstances of the individual.

The varying types of debt consolidation loans

A debt consolidation loan may take a number of forms. It could be a free standing loan agreement, possibly as an unsecured loan (usually only in the case of smaller loans), or as is more likely, it could be secured on the borrowers home, even if a mortgage already exists on the house. Another option for a homeowner with a reasonably small mortgage relative to the value of their property, is to remortgage to release some of the tied up equity in their home. This may not be a feasible option if there are large redemption penalties on the existing mortgage, which is more likely to be the case if a borrower is still in the early years of the mortgage. A borrower should weigh up the relative merits and costs of all the alternatives before deciding on a particular route.

Factors to consider when applying for debt consolidation loans

A debt consolidation loan may seem, on the face of it, to be a simple and easy solution to solving someone's financial problems, but experience tells us that when something appears to be too good to be true, it often is! Therefore we must add a note of caution at this point. Although payments may be reduced by taking a debt consolidation loan over a long period, these payments and also the interest payable, are charged over a much longer term than the original debts and a borrower could well find themselves paying more in total than if they had never taken out the debt consolidation loan in the first place.

Another important factor to remember is that, although the monthly repayments may have gone down, the overall level of debt has not gone away and borrowers should not fall into the all too common trap of running up balances on their credit cards, or taking out other loans, just because their monthly affordability figure has improved. This leads right back to square one and the whole spiral can start again, but by this time it may not be possible to consolidate these debts a second time.

To summarise, debt consolidation loans can be a useful tool for those individuals who have unwittingly managed to burden themselves with large balances with a number of creditors and indeed, such a loan could make the difference between an affordable lifestyle and a bad credit rating, with all the implications that brings. However, a borrower should be careful to check the small print before entering into a debt consolidation loan agreement and be fully aware of the total costs involved. This type of loan could be considered as a “get out of jail card” and as such, debt consolidation loans should only ever need to be taken out once!