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Consolidation Debt Loans:
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Definition Of Debt Consolidation
Consolidation Debt Loan: About This Page
The term 'debt consolidation' is used in different ways, so I need to clarify this before we go any further. This page relates to debt consolidation loans, which involve borrowing money to pay off existing debts. Debt consolidation is also used, particularly in the US, to mean the same as debt management. In this sense, debt consolidation means using a debt management company to set up an informal arrangement whereby debt advisors negotiate with your creditors to agree new, affordable terms to repay your debts. This does not involve borrowing more money, and if you are interested in finding out more about that type of debt consolidation, please visit the Debt Management page.
Consolidation Debt Loan: How It Works
The first thing to say is that taking out a consolidation debt loan is not the best solution for every situation. I think a lot of people turn to debt consolidation through unsecured loans simply because it is one of the few debt solutions that they are aware of, so they think of it automatically without necessarily considering all the other options. There are certainly some circumstances when a debt consolidation loan will help you, but in some situations it could actually make your problems worse. Generally speaking, consolidation debt loans are unlikely to be the best solution for very significant amounts of debt. If your debts are well into the thousands, you might be better off looking at Debt Management or (for UK residents only) an IVA.
For that reason it is important to have an understanding of how consolidation of debt using an unsecured loan works before you enter into any agreements. Take some time to read this page, which will help you find out if you are in a situation where a loan might help, or whether you would be better off talking to a Debt Management Company about the alternatives. You will also find out about a few things that you need to consider if you do take out a loan, to make sure that you are using it to the best advantage.
Debt consolidation is about taking out a new unsecured debt loan and using it to pay off all your old debts. There are generally two great attractions to this idea. Firstly is the fact that instead of lots of individual debts to keep track of, you only have one monthly payment to worry about. This makes things much simpler and can genuinely be a benefit in terms of helping you to keep on top of things and not miss any payments by accident. The other main benefit is that your new single monthly payment will normally be less than the sum of all the monthly payments for your existing debts.
Consolidation Debt Loan: The Advantages
- You only have a single monthly payment to worry about.
- It should be easier to keep track of your debts and less likely that you will miss payments and fall behind.
- You can use a consolidation debt loan to pay off your Priority Debts (mortgage, etc), which you cannot do with debt management plans, debt settlement, IVAs, etc.
- You can swap high interest rate debts for a loan at a lower interest rate.
- Your monthly payments should be less than the combination of your current debts.
- You have a definite end date for when you will become debt free.
Consolidation Debt Loan: Possible Consequences
Depending on the lender you deal with, a reduced monthly payment does not always mean that you are better off in the long term. Some lenders talk people into ridiculously long repayment periods, lasting far longer than your original debts. What this means is that you could end up paying slightly less each month, but keep on paying for much longer, with the result that you end up paying the loan company much more that you would have paid if you had had just carried on as before.
For example, if your old debts are costing you £100 per month in total, but you expect to pay them off in two years, the total cost to you is £2,400 altogether. If you were to take out an unsecured debt loan and reduce your payments to an attractive £75 per month, then that looks like a good deal. But if the terms of that new loan require you to keep paying for four years, then you will have paid back £3,600 by the time you are finished. So you gain a bit of breathing space on the monthly figure but end up paying £1,200 more than you would have if you had not taken out the loan.
So if you do decide that a debt consolidation loan would help you, take care to only deal with reputable lenders. Have a look at the following brief guide, which gives some indication of when a debt consolidation loan may be most appropriate. Remember that a loan is not the only way to consolidate your debts, and you may decide your circumstances are better suited to a Debt Management Plan (DMP). If you are in a very serious situation, and might struggle to keep up with payments on a loan or DMP, you may need to look at an IVA (for UK residents) or Debt Settlement (for US residents). If you wish to learn how to negotiate debt settlements yourself, you should look at the Learn Debt Negotiation page.
When An Unsecured Debt Loan May Be Useful
When a consolidation debt loan Could Help You:- When you are paying high interest rates on current debts
- At times of low interest rates because the rates on a new loan should be better than the rates on your existing debts
- When you have checked properly what you can afford and you are positive you can meet the new loan repayments for the full term of the debt consolidation loan
When An Unsecured Debt Loan May Not Be The Best Solution
- If you have taken out debt consolidation loans before and it has not worked for you
- If you plan to use it to pay off a previous debt consolidation loan
- If you want to pay off credit cards so that you can carry on using them again
When Considering Using Unsecured Loans To Consolidate Debt:
- Only apply to well established and reputable lenders
- Apply to at least two or three companies so that you can compare interest rates and offers
- Consider whether you have enough surplus income each month to make the new payments (you might even want to prepare a Personal Financial Statement to identify your Surplus Income)
- If you think your situation might get worse, or you are in doubt about whether you will keep up with the payments, consider a more flexible Debt Management Plan instead.
- If you are using the debt consolidation loan to pay off credit cards, make sure you cut the cards up and cancel them straight away. DO NOT continue to use them.
Debt consolidation loans can be a useful thing, provided you use them properly. If some of your existing debts are at a particularly high rate of interest, and interest rates have since dropped, then you may be able to get a loan at a lower rate of interest than your old debts and save yourself some money.
The best way to check this is to list out all your existing debts with the rates of interest that you are paying on them. Put them in order starting with the highest interest rate at the top. Take the interest rate for the consolidation loan you want to take out and draw a line across your list at that level. If you only use a loan to consolidate the debts above that line, you will be better off.
Recommended Lenders For An Unsecured Consolidation Debt Loan
Lenders will only offer loans in the country in which they operate. At the moment the only recommendations are for UK lenders, but recommended loan companies for the US will be added soon, when I have carried out further research.
US residents can find recommendations on US companies that can assist them on the Debt Management and Debt Settlement pages.
LoanFinder (UK Only)
This reliable company are a broker that can offer a wide range of different types of unsecured loans, including to consolidate your debts. You just fill out the online form and then your requirements are checked against over 200 reputable lenders to find the best consolidation loan for you.
The application form will take less than five minutes to fill out, but take the time to complete it as fully and accurately as possible in order to get the best match with the most appropriate lender. Go to the application form now.
Express Debt Solutions (UK only)
Express Debt Solutions have many years experience and pride themselves on taking a personal approach to every customer and coming up with the best option for your particular needs. Simply go to their website and click on the 'Apply Online' button on the left.
