Are you suffering and getting lost under a pile of debt from various providers? If you said yes, one option you can consider is to get a large loan to repay all of these debts. This way, you will get a consolidation loan with one monthly payment instead of a bunch of small payments on each of your debts. Our helpful guide will help you create a strong loan consolidation plan and get the best out of it.
Who is a consolidation loan right for
If you currently are making numerous payments on a number of loans, credit cards, and overdrafts that are due at various times throughout the month, a debt consolidation loan will bring all of these together, and you will have a fixed rate and only one payment every month.
If you find yourself battling a mountain of debt, there are other options other than a consolidation loan.
Advantages of a consolidation loan
If you are carrying a great deal of debt, the advantage of getting a consolidation loan is that you no longer have the hassle of having to handle a bunch of different loans and their associated payments. Then there is the administering of all of these.
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, 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.
The disadvantages of a consolidation loan
However, you need to be aware that a consolidation loan can also be risky, and you can find yourself in worse shape than you were to begin with if you don’t proceed with caution. You might find yourself with higher interest rates and longer loan periods than what you had previously. Before doing this, it’s a good idea to seek financial advice and determine how much you can actually afford to be paying out monthly on your loan, and determine if this is the right choice for you.
When it comes to extending your loan for a period that’s longer than what the original term was, you need to be careful. The same applies to interest rates that are higher than what you are currently paying. This way, you may land up paying more than you would by leaving things as they are. It can be tempting to borrow extra money when you do a consolidation loan. You should not do this, because consolidating is supposed to be a tool that you have to reduce and wipe out your debt so you could start fresh.
Is a secured loan a good choice?
Your consolidation loan can be either unsecured or secured. If you secure your consolidation loan against your home and later on you get behind with your payments, you run the risk or your home being repossessed. For borrowers who are struggling, it’s usually not a good idea to get a secured loan. You are already in financial duress, so do you want to put your home at risk? A secured loan can provide a lower interest rate, but you should give such a loan plenty of consideration.
If you are fighting growing debt, there are other options to look at besides a consolidation loan. There are a number of charities that provide you with free advice, like National Debtline or Consumer Credit Counseling Service. So take the time to talk with an adviser to help you find the best solution.