Debt Consolidation Loans

A debt consolidation loan allows you to condense all your current debts into one lump sum. For some people it can be the best way of managing their finances as they will only have one monthly payment to pay each month. Many people don't realise how much debt they have accumulated until it is all added up, but being in debt can cause stress and worry, and many people feel that there is no way out of the situation. Lumping all your loans, store cards, credit cards and other debts into one manageable monthly payment has worked for many people with large, multiple debts.

Secured or Unsecured Loans?

A debt consolidation loan can be an unsecured loan which is the only option available to many people such as tenants, or a secured loan which is only available to homeowners. Secured loans will generally get a lower rate of interest, as your home is used as collateral so the lender will use your home to repay your debt if you default on your repayments. An unsecured loan is seen as being slightly riskier from the lenders perspective as he doesn't have any way of recouping the money loaned to you if you default. This incurs a higher interest rate on any money borrowed as an unsecured personal loan, however you always have to weigh up the pros and cons for each type of consolidation loan. Many people have had their homes repossessed after finding out they were unable to continue paying off their debts, so make sure it is the right choice for your own personal circumstances.

Debt Consolidation - Advantages

There are several advantages to consolidating your debts. You can reduce your monthly outgoings considerably, in some cases by up to 75% per month, by combining your debts and repaying them over a longer fixed term. It can also simplify your budget so you only have one repayment each month and you know exactly what that amount will be and when it will be paid off in full.

Debt Consolidation - Disadvantages

Having a debt consolidation loan does have some disadvantages though. They can often lure people into a false sense of security and many people can end up racking up more debt on existing or new credit and store cards. It could also lower your monthly repayment amount overall but this will mean it takes longer to pay off so you need to make sure you won't be paying over-the-top interest on the Total Amount Repayable (TAR).

There are a wide selection of consolidation loans, sometimes it makes it hard to choose the one to suit your individual situation. Many lenders will offer loans for debt consolidation to a range of people with varying credit histories, including those with poor credit ratings or bad credit scores. Consolidation loans of between £3,000 and £250,000 can be taken out for terms of 5 to 25 years. Bear in mind that each loan company has different lending criteria and amounts and terms will vary between each one.

Debt consolidation can be a great way to get out of debt, however you have to beware of the risks and make sure you change your financial habits otherwise you could become even more in debt. With a little bit of thought and some time spent shopping around and comparing, you can ensure you make the best decision to help you out of your debt situation.