What is a Debt Consolidation Loan?
When you have a multiple debts at one time, it can often be tricky to keep on top of them. At its worst, it could cause you to fall behind on repayments, costing you money in interest; and eventually put you into further financial difficulty.
This is where a debt consolidation loan might be able to help. Essentially it allows you to roll-up all of your individual debts into a single loan. Merging your debts in this way lowers your monthly payments and it also means you owe money to just one lender.
Debt consolidation loans can be used to pay off a multitude of debts including credit cards, overdrafts and personal loans. They normally come in two forms: secured and unsecured. You can find out about the difference here.
Advantages of a Debt Consolidation Loan
The process of combining all of your debt can make your financial life a little less overwhelming. It can also give you the chance to cut back on spending and steer yourself on to a new path.
You can also reduce the amount of interest you are paying as well as the total amount repayable across your different debts. This however will depend on the terms of the loan agreement.
Disadvantages of Debt Consolidation Loan
There will be fees and other charges to factor in on top of the interest of the new loan. As a result you should always read the fine print and make sure the full cost of borrowing is understood.
If you don’t use it to pay off all of your debts then you might find yourself even worse off than before. Finally if you can’t keep up with the new payments then you could risk getting yourself into financial trouble, particularly if the loan is secured against an asset like your house.
Thoughts and advice
A debt consolidation loan can be a great way to regain control of your finances, allowing you to pay off all of your current debts in one go and subsequently owe money to just one lender.
Despite its apparent advantages, a debt consolidation loan isn’t right for everyone. In some circumstances a new loan simply won’t improve your financial situation. Furthermore, if you don’t keep up with the payments of the new loan then you are likely to end up worse off than before.
We recommend that you always do your take care to consider all of your options. Your bank is likely to offer debt consolidation loans however it’s always worth shopping around. If you use comparison sites you are far more likely to find a better deal.