Debt consolidation loans – a good idea?

What is a debt consolidation loan?

A debt consolidation loan is typically a loan of a large amount that you can use to consolidate all your existing credit. The purpose of this is to pay off all your outstanding debt so that you have just one loan left to manage.

People can have lots of small loans, credit cards or purchases made on credit. Smaller loans typically have higher interest rates so that lenders make enough money during the repayment period so they can make a profit from giving someone credit. Consolidation loans are bigger so they should have a lower interest rate in the same way as a mortgage loan for a house.

If you have a lot of small loans then applying for a debt consolidation loan may be the best option for you.

What are the benefits to getting a debt consolidation loan

A debt consolidation loan can be used to pay off all you existing loans. Usually a debt consolidation loan will have a lower interest rate. This can also be a great way to bring several loans together so that you are accountable to one lender rather than four or five at one time. This will help if you struggle topay all your loan repayments every month because if you can get theright consolidation loan with a lower interest, then this should helpyou stay within budget every month.

What are the disadvantages to getting a debt consolidation loan

The repayment period is usually longer so you will probably be paying more money in the long term. The other problem with debt consolidation loans is that it is typically successfully pitched to people that are struggling to pay their repayments. This means you have to read the small print very carefully to make sure you are not going to get ripped off by accepting bad terms and conditions. This may mean that the interest and repayments are structured in such as way that if you want to settle the loan earlier, you then find you end up with much more total debt to repay.

Things to remember

Debt consolidation companies have to make profit just like everyone else. The term you have to pay off your loan may be a long term commitment that doesn’t suit your life-style. So it is worth considering whether cutting back to pay for your current loans is better than spreading payments out over a longer time.

Because consolidation loans are much bigger loans you have to be more careful with the small print. Signing up to a high interest rate could mean you end up paying a similar amount to what you were paying but for much longer. You must make sure the numbers add up for you.

Remember not to make hasty decisions in signing up for a debt consolidation loan. If you have a great credit history and alot of credit on poor interest rates then it may be a good solution. However, if you have bad credit then reacting to your finances with a short term goal may just be setting yourself up for big debts in the long term future.

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