Do you have a pile of debt with different providers? If so, one option to tackle this is to take out a large loan to repay all of these debts under one roof.
Known as a consolidation loan, this will enable you to make one payment per month, rather than lots of smaller repayments on your debts.
Who are they suitable for?
These loans could be suitable for borrowers who currently make multiple repayments on a range of credit cards, loans and overdrafts at different times of the month. A debt consolidation loan brings these all together, with one repayment on a fixed rate.
If you're battling a mountain of debt there are other options you can consider, aside from taking a consolidation loan.
What are the advantages?
If you're littered with debt, the obvious advantage of taking this route is that you don't have the hassle of dealing with many different loans and separate repayments - and the administration headache that comes along with this.
These loans could also make it easier to budget for all your household costs with one regular, fixed cost to take into account. Also, if the new rate of borrowing is lower than your original debt you could reduce the overall amount you have to pay back.
If your credit rating has suffered as you've fallen behind on repayments on your original debt, this route offers a chance to demonstrate that you're a responsible borrower. So if you're disciplined and make the monthly repayments, and avoid taking on further credit until you've wiped out a consolidation loan in full, this could be a sensible option.
What are the disadvantages?
However, a word of warning. This route can be risky and leave you in a worse financial situation if you're not careful, with higher rates of interest and longer timeframes than your original debt. So seek advice and work out how much you can really afford to pay each month on your loans, and whether this is the right option for you.
Beware of extending the loan over a longer term than your original debts, or taking on a higher interest rate than you're paying already. By doing this, you'll end up paying more in interest over the long-term and increasing the sum you owe. Also while tempting, avoid borrowing more than you need through a consolidation loan, as they should be a tool to wipe out debt and give you a fresh start.
Should a secured loan be considered?
A consolidation loan can be secured or unsecured. While it is an option to secure your debt against your home, if you fall behind with payments in the future you risk repossession, so it's unlikely to be a wise option for struggling borrowers. While a secured loan might offer a lower interest rate, think long and hard before taking one on.
If you're battling a mountain of debt there are other options you can consider, aside from taking a consolidation loan. There are several charities that offer free advice, for example, such as the Consumer Credit Counselling Service (CCCS) and National Debtline. So speak to an adviser there who will help find the best solution for your situation.
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