What Is A Debt Consolidation Loan?
If you have found yourself struggling with debt and looking for ways to handle the growing costs, the first step is not to panic or worry. There are lots of different options available to control and cope with debt, some of which may help prevent further issues in the long term, and one of these is a debt consolidation loan.
What Is A Debt Consolidation Loan?
A debt consolidation loan merges all of your debts into one figure, providing you with enough money to cover the monthly payments and a sole lender to repay. Instead of paying for debts in separate amounts, debt consolidation loans combine each debt into on lump sum, making your debts much more manageable and less complicated. They can also make it easier to track your debts and manage your budget.
There are two types of debt consolidation loan:
• Secured – this type of loan is secured against an asset, such as your house or car. If you miss repayments, this asset will be repossessed, so this loan requires careful consideration. Secured debt consolidation loans are usually offered if you owe a lot of money or have poor credit history.
• Unsecured – this type of loan is not secured against a personal asset. Typically, unsecured loans allow you to borrow up to £25,000, so if you need to borrow more, a secured loan may be offered instead.
What Are The Benefits Of Debt Consolidation Loans?
As well as helping you to manage your debts, there are several other benefits to using debt consolidation loans, including:
• They can allow you to take advantage of lower interest rates by switching higher interest loans into one lower rate loan that combines all your repayments.
• They can streamline the organisation and repayment process, helping you to keep a clear head and simplify the experience.
• They can help to safeguard your credit score. By combining all of your debts into one lump sum, you will only be making one payment a month, rather than potentially multiple payments, depending on the amount of debts you have, making you less likely to miss a repayment.
• They can help you budget because you will know exactly how much you are repaying every month.
While these benefits are ideal if you need to manage your debts, there are several disadvantages to debt consolidation loans that should be considered before applying. Depending on the size of your original debt, you may end up taking out a loan that is larger than all of your combined debts, which could leave you out of pocket in the future. You may also end up paying a higher rate of interest and there may be hidden fees involved. Before agreeing to any loan, you need to conduct thorough research to ensure it’s right for you and your budget.
Are There Any Alternatives To Debt Consolidation Loans?
Taking out further loans if you are already in debt is not always the best way to manage your money, but there are alternatives available to stop you from borrowing or creating more debt.
You can consider a balance transfer credit card, which allows you to transfer debt from other credit cards or use a balance transfer check to combine your debt at a 0% interest rate. This method pauses the accumulation of credit card interest, making it a great way to pay off small sums of debt.
If you have a trusted friend or family member, consider discussing personal borrowing to enter into an interest-free agreement with a repayment plan that suits you both. You could also ask for an advance on your salary to cover monthly payments a little more.
If none of these alternatives work for you, try pursuing debt settlement, which is an attempt to get your creditors to agree to a single, reduced payment on your debt. This is a great way to quickly get rid of debt and save a lot of money in the long run, however, it can be risky and possibly affect your credit score.
