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Debt Consolidation: Free Expert Guide
Debt consolidation decision is not one to be taken lightly. Such decision should be weighed against your personal circumstance, as well as having a clear understanding of the potential benefits and problems. It is not a risk free debt management step.
But what exactly is involved in consolidation of one’s debt? Debt consolidation purely means the taking out of a single loan to pay off other multiple loans. It is like borrowing $100.00 from Peter to pay Paul, Banabas and Timothy. You end up saving on interest you would otherwise be paying to each of your previous multiple lenders.
Strictly speaking, it is different from debt settlement, which involves agreeing with your creditors on a planned payment scheme.
Consolidation of debts works out best if you took an unsecured loan to pay off multiple credit card debts. This is because credit card debt interest rates are usually so high sometimes up to 3 – 4 times that of unsecured loans. It can also be done to pay ordinary loans or consumer debts. You can also take secured loans to pay off unsecured loans, as another form of consolidation of debts. The advantage with this particular option is that since you will be taking a secured loan on collateral like your house, car or any other assert, the interest paid on the secured loan would be less and can give you some payment respite.
Whether you want to take this option or not should be carefully considered too. There is more to it than meets the eye. You may end up paying much more at the long run. The immediate advantage here however is that your monthly repayments will be lower. A debt consolidation loan can be arranged by an individual debtor (yourself) or through debt consolidation organisations.
Abacus is a leading debt consolidation company in the UK.
America's Lending Partners is widely used in the US.
Consolidating one’s debt through borrowing an unsecured loan to pay off multiple other loans could have great benefit. Ngozi, a top city architect found she was caught in a web of four credit cards and an unsecured loan debt.
Though with a respectable monthly salary of about £2600.00 per month, she owes £17,500.00 on credit cards (paying combined monthly interest of £240.00 on the four cards on a minimum payments of £545.00) and another £18,000 unsecured loan (paying a monthly loan repayment amount of £475.00 over 84 months, with £62.00 being for payment protection insurance). She struggled month in month out to meet up with her mortgage repayments, other direct debits, and other commitments, leaving her in a negative balance every week after payday. "Something has to be done about this" said Ngozi. "Other aspects of my life started suffering. Financial stress was ruining my life".
She decided to go for another unsecured consolidation loan of £40,000.00. At 6.4% APR for 84 years and monthly repayment total of £612.00, she knew she definitely got a deal. She paid off the credit card debts which were on an APR of 17.5 – 28%, as well as the other unsecured loan. That single action reduced her monthly repayments from £1020.00 to £612.00 per month, saving £408.00. Believe it! The time span for loan payment remained the same, and no property placed at risk. Ngozi was perhaps fortunate to get a good bargain, possibly because she is an architect, with good income, and met her very own bank manager who has access to her financial records. You may qualify for an unsecured loan to pay off all other debts. Do not hesitate to speak with your bank manager for a debt consolidation loan. Another advantage of a debt consolidation loan apart from helping you pay less interest and possibly avoiding some other fees (like multiple payment protection fee) is that you could have some extra cash on hand to start re-pairing your life, yet still paying less amount in monthly out going. Your credit rating is set to improve too.
If you are able to get an unsecured loan to pay of your debts, the only potential danger with debt consolidation here is that some may relapse into taking out more borrowings on their credit cards and start the whole vicious cycle again. This should not be. The true cons with debt consolidation lie in the fact that if you take a secured loan on your property (mortgage) to pay an unsecured loan, you may risk loosing your property if you default on payment. You may also end up paying more than the original pay-back if the loan is placed on your mortgage, and paid over the life of the mortgage. Debt consolidation can also affect your eligibility to discharge you of your debt should you decide to go for bankruptcy at any point in time on the said loans. Should you not be able to arrange and execute your debt consolidation plans and decide to do it through a debt management organisation, you may end up paying a large fee. If you are also suspected to be desperate, you can easily be preyed upon. So never panic or be terrified. Stay calm
You should approach a debt consolidation organisation if you are unable to get a debt consolidation loan by yourself
Debt consolidation should grossly ease your financial diificulties if well planned. But remember to check out your other options before taking on a debt consolidation loan.
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