If you’re struggling to manage a pile of debt from different providers, and you’re not sure how to get a handle on your money worries, then you may have begun to consider the benefits of a debt consolidation loan. When loans seem to be adding up from dozens of different locations, debt consolidation solutions can be a great way to place all of your different repayments under a single roof.
Debt consolidation loans are simply a way for you to pay off many smaller loans, with one larger personal loan. This means that all your money worries go into the same place. Often, this can make life a lot easier for some people, as it means you don’t have to worry about keeping track of different debts. You simply borrow enough money to pay off your current debts, then work exclusively to pay back a single lender.
The Types of Debt Consolidation Loan
There are two different types of debt consolidation loan available to choose from. While both work, in the same way, each offers its own advantages and disadvantages worth considering before you make a decision. The forms of consolidation loan available are:
- Secured loans: Where you borrow money against an asset like your home. If you lose repayments, the lender has the right to take your home.
- Unsecured loans: Where your loan isn’t secured against any assets.
Whether it’s a good idea to secure your debt against your loan will be a decision that’s up to you. If you’re struggling with your repayments, it’s often a better idea to go unsecured, as you don’t have to worry about risking your home ownership this way.
Debt consolidation loans, in general, are most suitable for borrowers who are currently paying numerous different repayments on a range of overdrafts, loans, and credit cards, often at different times during the month. Consolidation loans can bring all your debts together in a single place, with one repayment using a simple and clear fixed rate.
What are the Benefits of Debt Consolidation?
If you’re in the process of dealing with huge amounts of debt, then there’s a good chance that a debt consolidation loan will appeal to you. The most obvious advantage of consolidating your loans is that it means that you won’t have to manage the hassle of dealing with different repayments and separate loans throughout the month. This can also mean that you cut down on a lot of administrative headaches.
A debt consolidation loan can also make it easier for you to budget all your household costs each month because you know exactly how much you’re paying out. Also, if you can choose a borrowing rate that’s lower than your current debt, then you might be able to reduce the money you spend on your debts overall.
Another positive to consider with debt consolidation loans is that if your credit rating has begun to suffer because you’re falling behind on your repayments, you’ll be able to begin demonstrating that you’re a responsible borrower again. This means that if you’re disciplined enough to make the monthly repayments on time, you can start to build your credit rating again. Just make sure you avoid taking out extra credit until you’ve gotten rid of your consolidation loan first.
When to Think about a Debt Consolidation Loan
There are plenty of different scenarios in which a debt consolidation loan can make sense. For instance, if you’re struggling to manage your current spending. However, it’s important to make sure that your savings aren’t wiped out by charges and fees, and that you can afford to make your repayments for the life of your new loan.
You should also make sure that you’re paying less interest overall than you would have been paying beforehand. This can sometimes be difficult if you choose to take out a long loan term to spread out the cost of your debt.
Before you get your loan, think carefully about your ability to make repayments, and whether you’ll need to put any contingency plans in place. Once you’re ready:
- Get rid of your credit cards to reduce your risk of over-spending after you have your new loan
- Don’t just compare loans based on the headline rate of interest. Make sure that you compare the APR, or the annual percentage rate, as this includes arrangement fees and other expenses too.
- Get any advice you need before you make a final decision.
- Make sure that you shop around with comparison websites to find the best deal for your current circumstances.