At first glance the option of taking out a loan to consolidate other debt may look very appealing.
The monthly payments of the consolidation loan should be lower than the sum of the payments of the consolidated debts thus reducing the amount you have to pay towards your debt each month. In addition the interest rate is often lower than the rates on say the credit card balances you have consolidated.
However debt consolidation is not right for everyone. Before going ahead you must consider some key factors which if ignored could mean that your debt problem actually becomes worse.
You will only be able to borrow more money if you have a good credit rating. If your credit rating is already poor because you have missed debt payments in the past or you have already had multiple loan applications turned down, you will probably not be offered a consolidation loan and you will need to choose an alternative debt management solution.
It is therefore sensible to check your credit rating by getting a copy of your credit file before making a loan application.
If you are facing financial difficulty it may be extremely tempting to take a consolidation loan simply because the monthly loan repayments are significantly less than the amounts you are paying to the debts you want to consolidate.
However, before you take the loan make sure you can afford to repay it from your disposable income by analysing your personal income and expenditure.
Note: You will make your debt situation worse if you take a consolidation loan which you actually cannot afford to repay. If this happens then immediately after taking the loan you will still have to use credit cards again to supplement your income and your debts will continue to increase in size.
You need to be aware that as soon as you take a consolidation loan you will owe more than the total value of the debts you have consolidated. This is because the bank will add interest to the consolidation loan.
For example, if you borrow £10,000 over 5 years at 8% APR, you will end up repaying approx. £12,350 back at the end of the 5 year period.
If you decide to use consolidation as a means of resolving a debt problem you must also plan to change your spending habits and live within your means from now on. Make sure that you analyse your personal income and expenditure to ensure that this is possible and identify where you can make savings.
If you continue to spend beyond your means then it will not be long before you are using your credit cards again and they start reaching their limits. But now you also have your consolidation loan repayments to make as well.
The best advice is once you have consolidated debts such as your credit Cards cut them up and do not continue to use them.
Debt Consolidation is not the only debt solution which might be suitable to resolve your debt problem. Before making your final decision to consolidate your debt you should also consider the other available debt solution options. For more information please see: Personal Debt Solutions