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Debt Consolidation
Loans – a Good Idea?
What is a debt consolidation loan
A debt consolidation loan is typically a loan of a large amount that
you can use to consolidate all your existing credit. The purpose of
this is to pay off all your outstanding debt so that you have just
one loan left to manage.
People can have lots of small loans, credit cards or purchases made
on credit. Smaller loans typically have higher interest rates so
that lenders make enough money during the repayment period so they
can make a profit from giving someone credit. Consolidation loans
are bigger so they should have a lower interest rate in the same way
as a mortgage loan for a house.
If you have a lot of small loans then applying for a debt
consolidation loan may be the best option for you.
What are the benefits to getting a debt consolidation loan
A debt consolidation loan can be used to pay off all you existing
loans. Usually a debt consolidation loan will have a lower interest
rate. This can also be a great way to bring several loans together
so that you are accountable to one lender rather than four or five
at one time. This will help if you struggle to pay all your loan
repayments every month because if you can get the right
consolidation loan with a lower interest, then this should help you
stay within budget every month.
What are the disadvantages to getting a debt consolidation loan
The repayment period is usually longer so you will probably be
paying more money in the long term. The other problem with debt
consolidation loans is that it is typically successfully pitched to
people that are struggling to pay their repayments. This means you
have to read the small print very carefully to make sure you are not
going to get ripped off by accepting bad terms and conditions. This
may mean that the interest and repayments are structured in such as
way that if you want to settle the loan earlier, you then find you
end up with much more total debt to repay.
Things to remember
Debt consolidation companies have to make profit just like everyone
else. The term you have to pay off your loan may be a long term
commitment that doesn’t suit your life-style. So it is worth
considering whether cutting back to pay for your current loans is
better than spreading payments out over a longer time.
Because consolidation loans are much bigger loans you have to be
more careful with the small print. Signing up to a high interest
rate could mean you end up paying a similar amount to what you were
paying but for much longer. You must make sure the numbers add up
for you.
Remember not to make hasty decisions in signing up for a debt
consolidation loan. If you have a great credit history and a lot of
credit on poor interest rates then it may be a good solution.
However, if you have bad credit then reacting to your finances with
a short term goal may just be setting yourself up for big debts in
the long term future. |
