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Debt Consolidation
Many people today have numerous credit accounts between cards, store charges, or financed payments on items such as furniture or electronics. Every account has a different payment date, a different minimum amount due every month, and a different lender. When debtors get confused about their many accounts, payments are often missed, or the wrong amount is sent to a lender because they confused them with another lender. To simplify their lives, people are beginning to turn to debt consolidation.
What is debt consolidation?
Debt consolidation is when you take out a large loan to pay off all of your smaller accounts. Instead of having numerous smaller credit accounts to pay, you will now just be making one payment to one lender.
What are the benefits of debt consolidation?
As mentioned above, debt consolidation will simplify your life by reducing the number of lenders you have to one. Depending on the method of consolidation, the process could even save you money. If you are able to get a lower interest rate on the consolidation loan than the average of your current interest rates on all of your combined debt, you will be saving money on interest over time, which will result in a lower monthly payment.
What types of debt consolidation loans are available?
- A debt consolidation remortgage is a method of using the equity that has built up in your home to pay off all your other loans. The interest rate is typically low on this type of loan, which should reduce your monthly debt payments. The interest rate is also fixed, so there are no surprises about your bill. One word of caution about debt consolidation remortgages: Since the loan is tied to your house, your house is acting as a type of security on the loan. Should you fall behind on payments, you will risk losing your home. In other words, only opt for this type of loan if you are certain you will have the income necessary to make payments on time every month.
- A secured debt consolidation loan is a loan where you must offer items as security on the debt. These will be expensive items such as vehicles, jewelry, electronics, or your home. Unlike in a debt consolidation remortgage, a secured loan uses your actual house as collateral, rather than the equity from your home. You usually have to own the items you are using as collateral, but you only need to have paid off 25% of the amount of your mortgage to use your home for a secured loan. In the case of failure to pay, the belongings you have pledged as collateral on the loan will be seized and repossessed to satisfy payment of your loan. As with a debt consolidation remortgage, you need to be cautious in risking your items for a consolidation loan. Be sure you are able to afford the payments before you enter into an agreement.
- An unsecured debt consolidation loan is a loan offered with no items backing up the loan. Generally, these types of loans will be for lower amounts, usually under £10,000, and are offered to people with good credit. Since there is nothing guaranteeing the loan, the interest rate may be higher than with a secured loan. You will need to determine the average rate of interest you are paying on your debt currently to see if the rate on an unsecured debt consolidation loan will save you money.
What should I look for when applying for a debt consolidation loan?
The best advice is to read the fine print. Many consolidation loans come with fees, so be sure that the cost of the fees is outweighed by the benefit of making one monthly loan payment. Besides assuring that the interest rate will be less than the current average interest you are paying on all of your credit accounts, take note of the terms of the interest rate. Is there a clause that allows the lender to raise the interest rate? If that is the case, pay attention to how high the lender is allowed to raise the rate. In the end, a consolidation could cost you more than it is worth.