Debt Consolidation Loans
What is a Debt Consolidation Loan?
A debt consolidation loan combines all, or a significant amount of, existing debts into a single loan. The money from the loan is used to clear these debts, before being paid off itself in monthly installments. Most debt consolidation loans are unsecured, so your home is not at risk should you default on payments. If you have a large amount of debt or a poor credit rating, though, you might only be eligible for a consolidation loan which is secured against your home.
Many people choose a consolidation loan because transferring multiple debts to a single loan provider makes them easier to keep track of. Additionally, these loans are usually paid back over a longer period of time, meaning they are often more manageable. Taking out a consolidation loan also has the potential to improve your credit rating, since clearing and closing credit card accounts demonstrates responsible financial management. Debt consolidation loans generally help to manage debt rather than reduce it- even if the interest rate and monthly payments are lower on a consolidation loan than on your original debt, you are likely to pay more overall since your repayments are spread over a longer period of time.
The main advantage of debt consolidation loans is that they allow you to make one monthly payment rather than several, hence keeping track of your finances becomes simpler. These loans, literally, buy you more time to clear your debts, and with lower monthly payments. Unlike pursuing a formal debt solution, taking on a debt consolidation loan will not impact negatively on your credit rating, and could even improve it. This type of debt solution is best suited to people who can consistently manage monthly payments over an extended period of time, and ideally a good credit rating, which will help them secure loans with lower interest rates.
On the other hand, a debt consolidation loan may have a higher interest rate than your current debt, meaning that you will pay more overall. Repaying your debt over a longer period of time will also raise the cost of borrowing. Clearing credit card debts early might incur extra charges too, and some consolidation loan providers charge an arrangement fee. Finally, if you have a poor credit rating, you might only be offered a secured loan, potentially putting your home at risk.
It is sometimes possible to transfer credit card balances to a card with a lower interest rate, or a 0% APR introductory offer, which will reduce the amount you repay. Again, though, such offers are usually only available if you have a good credit rating, which is unlikely if you have been struggling with debt.
If you are relying on credit to meet basic living expenses, or do not have a stable income, a debt consolidation loan is not likely to be the best solution for you. One alternative is entering into an Individual Voluntary Arrangement (IVA). This is a legally binding debt solution in which an Insolvency Practitioner mediates between you and your creditors to agree upon a single monthly payment, based on what you can afford. An IVA is often advantageous, since a proportion of your debt is usually written off, although entering into one will affect your credit rating, and is recorded on the Individual Insolvency Register.
Debt Management Plans are a similar solution. These plans have the advantage of not appearing on the Insolvency Register, but since they are not legally binding, creditors may still require the full repayment of your debts in the long run, and are allowed to continue communication with you.
Help and Advice
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