Consolidation loans are a way of taking out a single loan to pay off other debts. Although this can be the best way of dealing with debt and managing your finances, it is important for borrowers to be aware of the implications of debt consolidation and review other options.
Alternatives to debt consolidation
Before choosing a debt consolidation loan, there may be alternatives. These can include using the credit options that you already have, borrowing from relatives or friends, or taking advantage of a free service such as National Debtline to assess your best options.
Choosing the right consolidation loan
If you have reviewed your debt options and decided that a consolidation loan is the best course of action, make sure that you choose the right consolidation loan. This may mean shopping around for the best terms and not simply choosing the first option of getting out of debt. A reputable lender such as an established bank or building society might be able to offer a personal loan to use for debt consolidation.
Why would I choose a consolidation loan to get out of debt
If you us a consolidation loan with care, it could help you to control your finances better. Advantages of consolidation loans include the ability to pay off priority debts, paying a lower rate of interest, lowering monthly repayments, a clear indication of when the debt will finish, making a single monthly repayment rather than many, dealing directly with a single lender rather than many.
What are the drawbacks of consolidation loans
Disadvantages of consolidation loans may include paying more in total due to the extra length of the loan, paying extra charges and setup fees on the new loan, falling into difficulties could mean extra problems if the single consolidation lender is not prepared to negotiate. If a debt consolidation loan is secured against your property, your house could be at risk if you fail to keep up with repayments.
Finding a consolidation loan
Getting the best terms on a consolidation loan will save you money, but it is important to understand the terms and conditions in detail. You should know exactly how much money you will have to pay back, whether monthly repayments are fixed, and the implications of missing a monthly repayment. Furthermore, the implications of early repayment need to be clearly understood.
Making a consolidation loan work to get you out of debt
Arranging a consolidation loan can be a good start to getting out of debt, but it means keeping all finances under tight control. For instance, debtors with a consolidation loan need to be extremely careful not to fall into any other types of debt. Lenders may be unscrupulous and encourage borrowers to go further into debt.
Consolidation loan insurance
Debtors need to be very careful regarding consolidation loan insurance. The terms and conditions need to be absolutely clear, and borrowers need to be sure that they need the insurance and that if they need to make a claim they have a chance of being successful.