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Debt consolidation loans
Lots of us owe money on more than one credit card or have several different credit agreements or loans in place. It can be tricky keeping track of them all – and if you get your finances muddled up and miss payments, you can soon get into big trouble.
This is when a debt consolidation loan can come in handy. As the name suggests, you consolidate all your debts into the one loan, so you only have one payment to make each month. Streamlining your debt obligations in this way can take a lot of the hassle out of managing your money.
Here, we explain exactly how this type of loan works, and why having one could help you get your finances back on track…
How do debt consolidation loans work?
With a debt consolidation loan, you simply move all your borrowing, or a significant chunk of it, onto the one loan.
You can then close down the various credit card and loan arrangements you’ve had previously, using your consolidation loan to clear the debts. Rather than making lots of separate payments to different lenders every month, you’ll only have to make one to your loan provider.
With each separate existing loan you look to pay off, check whether there are any early repayment charges – and, if so, factor them into your calculations.
Most debt consolidation loans are unsecured, which means the lender can’t lay claim to your home if you are unable to keep up with repayments. That doesn’t mean you can be casual about paying what you owe, however – the lender could still pursue you through the courts for its money.
Be wary of loans which are secured, as this means that the debt is held against your property (or another asset), so if you’re struggling with payments, your home could be at risk.
Pros and cons of debt consolidation loans
The biggest advantage of a consolidation loan is that all your debts are in one place, so you only have one interest rate to keep track of, and one payment to make every month.
This can make managing your debts much more straightforward than having to think about making several payments every month.
It will also mean you can close down other credit card and loan accounts, which should improve your credit rating as it will show lenders that you are managing your finances responsibly.
However, one disadvantage of consolidations loans is that you might end up paying more interest than you need to on some of your borrowing.
For example, if you are transferring credit card debts across to a consolidation loan, you will end up paying more interest than if you moved these balances to a balance transfer credit card offering a 0% introductory period on balance periods for several months.
Things to note when taking out a debt consolidation loan
When consolidating debts, work out how big a loan you will need and check the interest rate, as rates are usually tiered depending on how much you borrow. As a general rule, rates are lower the more you borrow, so if you are only just in a lower tier, it might make sense to borrow a bit more if that means you will pay a lower rate of interest.
If you think you might be able to pay off your debt consolidation loan early, check to see if there are any penalties for doing this. Remember that the longer you take to pay it off, the more interest you will pay overall.
Finding the right debt consolidation loan for you
There are lots of different loans to choose from if you are looking to consolidate debts, so always to plenty of research before applying for one to make sure you secure the best possible deal.