What is Debt Consolidation
Put very simply, debt consolidation involves taking out a loan with which to pay off all your other debts. So, in effect, you replace mutliple regular payments with just one. Seems easy, yes? Perhaps debt consolidation is the best solution for your current situation but it is vital that you take many things into account before going ahead. According to leading UK charity, Consumer Credit Counselling Service, taking out consolidation loans to pay off debts can have disastrous consequences for the over-indebted. When you think about it, borrowing to get out of debt can’t be a good idea because you’ll just end up owing more.
Reasons for Considering Debt Consolidation
Everybody’s circumstances are, of course, very different. Here are some reasons why you might want to consider debt consolidation:
- You are finding it difficult to keep up to date with existing debt repayments
- You are having problems affording day-to-day expenses
- Your existing debts have high interest rates and you would like to lock your debts into one, lower rate.
- You want to reduce your regular payments to a new lower amount
Advantages and Disadvantages of Debt Consolidation
- Debt consolidation can reduce your monthly debt repayments High interest rates are replaced with a lower rate.
- Debt consolidation will allow you to combine multiple debts into a single one
- Your creditors will go away – satisfied to have been paid
- You will have just one creditor to keep happy
- Debt consolidation payments can go on for many years
- Interest rates can be very high – you must check out the total amount you will repay over the period of the loan
- If the loan is a secured one, your house (or whatever you have used as security) will be at risk if you do not keep up the repayments
- You will be in debt for longer than if you paid off your debts individually .
- The contracts for debt consolidation loans are very prescriptive and you will incur a financial penalty if you lengthen or shorten the period of the loan
- A secured loan will be linked to the Bank fo England interest rate – so your repayments will increase as interest rates increas. The reverse is, of course, also true.
Debt Consolidation Regulation
Companies offering secured loans that are based on releasing the equity on your home via a remortgage must be registered with the Financial Services Authority, which makes it compulsory for them to provide you with certain information.
Loans that are not mortgages are not regulated in the same way. The loan company you use must have a Consumer Credit Licence issued by the Office of Fair Trading. This imposes certain conditions on them which require them not to mislead you.
It is rare to be offered an unsecured loan for amounts above £25,000. Once again, the Office of Fair Trading are responsible for regulating companies offering unsecured loans.
Choosing a Consolidation Loan
Apart from shopping around for the best terms you can find, you should take the following points into consideration:
- The period of the loan
- The total repayable figure
- The interest rate
- Is the interest rate fixed or variable
- The montly repayments
- What happens if you miss a payment
- Costs you will incur if you want to pay the loan off early
- If the loan is secured on your home, what will happen if you fail to keep up with the repayments
- If insurance is offered (which it almost certainly will be) ensure that you understand the terms and that you really do need it