Debt consolidation can be a good way to get on top of debt problems, but only
if used intelligently. Part three will take a look at the some of the things to
watch out for when considering debt consolidation.
Use our quick links to skip to other sections of this guide:
Debt consolidation: things to be wary of
-
Watch out for debt consolidation companies who heavily sell additional
insurances to accompany the loan. You may need protection against unemployment,
sickness, or critical illness, but you will almost certainly get it cheaper if
you buy it separately rather than bundled in.
-
If you fully understand the implications of what you are doing and are able to
access new borrowing at a low rate of interest, debt consolidation can be an
effective approach to a debt problem. But more often than not, it leads to
worsening debt and sometimes even potential homelessness. If you are
considering debt consolidation you must be aware of the downsides.
-
Debt consolidation is big business. And that means that some of the companies
who offer loans are far more concerned with maximising their profits than in
ensuring that a consolidation loan is the right option for you. Watch out
particularly for debt advice or debt management companies who suggest an
additional loan without full consideration of other options.
-
A few years ago, debt consolidation loans were only available to those with
flawless credit ratings. If you had current or previous arrears on your debt
payments it was unlikely that you could access more borrowing. However, there
is now a wide-range of companies that specialise in lending to borrowers who
are 'credit impaired' or 'sub-prime'. Of course, these companies do not do this
out of the goodness of their hearts. The number of borrowers with current or
past payment problems means that there is a large market for this borrowing
with interest rates that are higher (sometimes much higher) than you might
expect.
-
Remember that high interest debt consolidation loans - which are secured on
your property - are a win-win for the lender. If you repay, then they benefit
from the higher interest charges; if you default, they can repossess your home
and get their money back early.
