Consolidation Loans

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These work by allowing you to join your existing debts into one single debt with smaller monthly repayments. The loan is spread over a longer period of time than your previous existing debts. The interest rate charged will usually be less than the average rate of your existing debts put together.
 
If used properly consolidation loans can help you get out of debt faster by cutting your monthly repayments, making your payments easier and improving your credit rating.
 
However, a consolidation loan is not the answer for everyone. Consolidation loans should be avoided if:
 
1. You have consolidated your debts a number of times already ? this is proof that consolidation loans are not working for you.
 
2. You want the consolidation loan to include a previous consolidation debt.
 
3. You want to move debts from credit cards or store cards to free up your spending limit so that you can start spending again.
 
4. Your existing debts have had all the interest added at the start of the loan. This will mean that you are effectively paying interest twice (the interest charged for the first loan and the interest charged for the consolidation loan).
 
Consolidation loans are expensive in the long-term because the APR is usually higher as compared to other loans and because you will be paying more over a longer period of time.
 
Problems can occur if you have failed to get a proper settlement figure for your existing debts before taking out the consolidation loan. Remember that requesting a balance is not the same as requesting a settlement figure. The balance figure will show the amount outstanding on the loan but will not include charges such as penalties for early repayment.
 
You may also incur additional costs when setting up the consolidation loan. Consolidation loans also tend to come with payment protection insurance with costly premiums and terms which do not cover you for all eventualities e.g. redundancy cover.
 
Before deciding whether a consolidation loan is for you first take the time to:
 
1. Compare the deals offered by various lenders.
 
2. Work out a realistic budget plan setting out income and expenditure to establish how much you can afford for the new payments.
 
3. Consider an unsecured consolidation loan first as the advantage is that your home or property will not be at risk. However, unsecured consolidation loans generally attract a higher rate of interest.
 

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