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What is a debt consolidation loan?
What
is a debt consolidation loan?
If you find that you are unable
to meet your monthly repayments to your creditors,
one option is to apply for a debt consolidation
loan. The principle behind these is fairly
simple - you borrow a large lump sum to repay
your creditors and are then left with one
creditor and one monthly repayment. This monthly
repayment may be lower than the sum you are
currently paying, however, you will continue
making the repayments for a much longer period.
Before
you take out a debt consolidation loan
Before you consider taking
out a debt consolidation loan you should consider
the following:-
1. As there are sometimes
charges and penalties for early completion
of a credit agreement always ensure you obtain
a settlement figure from your existing lenders
rather than a balance. Otherwise you could
find you have not borrowed enough to repay
your other debts in full.
2. Once you know exactly
how much you owe and what the cost of your
debt consolidation loan will be, you must
take time to work out a realistic income
and expenditure figure to establish whether
or not you can afford the new payments. Remember
to include an amount for contingencies and
emergencies. If the sums still do not add
up, then perhaps you should consider some
form of debt
management plan.
What
are the different types of loan available?
The way in which debt consolidation
loans operate varies.
- You may be able to obtain
an unsecured loan for this purpose from your
bank or building society. The advantage of
this is that your home or property are not
"secured" against the loan and so
will not be in danger should you fail to meet
the terms of the agreement. The disadvantage
is that the interest rate you pay will generally
be higher than a secured loan.
- Several companies offer secured
loans at competitive rates. These may reduce
your monthly outgoings but remember that your
property will be secured against the loan
and if you do not pay it, the lender may take
proceedings to have your property repossessed.
- Alternatively you may be
able to re-mortgage your property to free
up some of the equity in your house. The advantage
of this is that you will be paying a lower
rate of interest, probably the same as your
mortgage rate. The disadvantages are that
although the interest rate maybe lower you
will probably be paying the loan over the
same period as your mortgage so overall you
will be paying more. Also your home will be
at risk should you default on the payments.
Ask your current lender what deal they can
offer you, then shop around to see if other
lenders can provide a better package.
The
advantages of a debt consolidation loan
- May be able to reduce your monthly payments.
- Can take off some of the pressure you
may be under from your existing creditors.
- You will have only one creditor to deal
with.
The
disadvantages of a debt consolidation loan
- Can pay more over a longer period.
- May incur additional costs for setting
up the loan.
- If secured, your property may be at risk.
- You will be left with only one creditor
- this can make it difficult to negotiate
should you have further problems in repaying
your loan.
- If the loans you are consolidating have
all the interest added at the start you
may in effect be paying interest twice.
The interest charged for the first loan
and the interest charged for the consolidation.
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