Category: Debt

What You Should Know about Debt Consolidation Loans

Loans can be very dangerous things when they are used without the proper care and attention. This is something that the UK as a whole knows very well. As a nation, the country owes more than £1 trillion in debts, and if you’re one of the many people who are struggling to pay back the money that you owe to creditors or banks, then it’s important for you to consider the different options that might be available to you.

In some cases, rather than simply trying to pay off the minimum amount required each month for your debt, it could be more beneficial to consider a debt consolidation loan that will help to reduce the amount that you owe overall, and ensure that you’re only paying out for one manageable payment each month. The important thing to remember is that you will need to examine all of the relevant issues in question when considering a debt consolidation loan, to see whether this option is right for you.

What is a Debt Consolidation Loan?

Sometimes, it’s possible for people to owe money to a lot of different places at the same time. For instance, you may have an outstanding balance on a personal loan, credit card debts, and an overdraft that needs to be considered too. Basically, a debt consolidation loan is a kind of loan that you can use to get rid of all of those separate concerns, and bring them together into a single place.

In simple terms, a consolidation loan works by having a lender pay off all of the debts that you already have, and transferring the money that you owe into a different loan that comes with a single monthly repayment. Although in these circumstances you will still be required to pay back all of the money that you owe, you might be able to reduce your monthly outgoings by a significant amount, reduce the interest rate that you have to pay, or spread out the repayments over a longer-term period.

Why Consider a Debt Consolidation Loan?

If you’re thinking about consolidating your debts, then you’ll need to understand exactly why this option is so beneficial for some people. Consolidation loans can help by reducing your monthly payments, by spreading the full term of the debt out over a longer time. This can help to reduce your monthly repayments to a more manageable level. Often people find themselves paying the very minimum payment allowed on their existing debts, which means that you end up only paying the interest on the loan while the actual amount owed remains unchanged. Sometimes, a consolidation loan can make it easier to start making a dent in the capital owed.

Consolidation loans can also work to improve your credit rating in some circumstances. If you are able to pay off the loan that you owe and you don’t take on any further debt, this should be seen as a positive step for your credit history. It’s also a good idea to check the details of your credit report in depth before you apply for a debt consolidation loan.

Finally, debt consolidation loans can also reduce the amount of interest that you need to pay overall. If your debts are with credit cards that have a high interest rate, then you might pay back less with a loan overall. You simply need to make sure that you find a loan that has a lower APR.

The Problems with Debt Consolidation Loans

Perhaps the biggest issue with debt consolidation loans is that you might end up being in debt for a much longer period than you actually need to be. It’s crucial to make sure that you weigh up all of the alternative options available to you that could help you to reduce your debts and pay off existing ones if you are considering debt consolidation loans.

Additionally, it’s worth noting that these loans should not be the first thing you do to take action against debt, especially if you can budget to get rid of your debt completely. If you do find that a debt consolidation loan is the best option for you, however, you will need to speak to a lender about your options. If you have a previous history of large debts or bad credit, then a lending company can only think about offering you a loan that’s secured. This will demand that you use your property as security for the loan, which reduces the lender’s risk. You will need to be very sure that you can pay those repayments, as your house could be at risk if you default.

Often, personal loans can be used as a solution to consolidate your debts. However, as with any other kind of borrowing, your lender will examine your credit history and the amount you want to borrow before deciding whether to offer you the amount you need for a low interest rate.