There is an important factor to remember when considering a consolidation loan; it doesn’t get rid of any debt. Instead, a consolidation loan simply offers some relief by combining the multitude of high interest rate debts into a single loan, often with a lower rate of interest. This amalgamation of various debts with a debt consolidation loan allows you to lower your monthly outgoings, making it easier to meet those usual monthly bills. However, there are a few options available to those wishing to consolidate all of their different types of debt into a single monthly payment. The repayment period could be much longer though. So, it might be easier to pay the monthly debt but it’ll take a longer period of time to pay it off.
The first option to consider, if the debt is mainly due to credit card arrears, would be the simple Balance Transfer.
Transferring the outstanding balance from a selection of credit cards to a single card that offers a lower interest rate, or even interest free credit, is the most accessible form of debt consolidation. Low balance transfer rates are a typical promotional technique employed by card companies to lure in new customers. These rates tend to expire after a predetermined period of time. So, know when the low rate will expire and what the standard rate of interest will be. The key point will be the finding a credit card with a big enough limit to hold all of your combined credit card debt. The downside to this method of debt consolidation is its effect on your credit rating. Even being approved for another card could be difficult though; since you’re already in debt your rating may have suffered.
The next option would be to take out a Personal Loan.
A personal loan is an unsecured loan that could be used to pay off other debt, therefore consolidating it into a single monthly payment. A personal loan tends to have fixed repayments over a fixed period of time. Being approved for a personal loan will partially rest on a favourable credit rating; if you have amassed a lot of debt and are already struggling with the repayments, the odds are that you could struggle to get approved for the loan. If the loan is approved, the chance of getting an agreeable rate of interest is also quite low. This makes it an awkward choice for debt consolidation.
Secured debt consolidation loans can be another means of consolidating debt into a lower interest payment.
Secured debt consolidation loans use the equity in your home as security against the debt. In order to qualify for a secured loan, you should have a reasonable credit rating. However, as it is secured against your home, the rating doesn’t need to be as high as it would be to qualify for an unsecured personal loan. So, it rests on there being a decent amount of equity in the home and while the interest rates are typically lower than other types of loan, the glaring drawback is having to put your home on the line. If the payments become unaffordable, there is the risk of repossession. Therefore loans which are secured against your home are not a particularly attractive proposition for a debt consolidation loan.
There are, of course, designated Debt Consolidation Loans.
Banks and credit unions often advertise specialist debt consolidation loans, solely for the purpose of combining your debt. There are a lot of different debt consolidation loans out there, so it’s important to choose the loan that best suits your needs. This hinges on finding a loan with a lower rate of interest than the rates you’re currently paying for your other loans. This may allow you to lower your monthly debt payments but it’s important to remember that it will also increase the repayment period.
Choosing a Debt Consolidation Loan Type
A debt consolidation loan doesn’t really get rid of debt but instead, simply moves it around and makes it easier to pay. It may make you feel like you’ve less debt and it may be tempting to borrow more but this is all just a false sense of security. The repayment period can often be a lot longer so it’ll require discipline to avoid borrowing any more until after you’ve paid the debt consolidation loan off.
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