A Complete Guide to Debt Consolidation
Debt consolidation is where an individual combines all of their existing debts into one single balance.
To achieve this, a debt consolidation loan will be taken out, which pays off all the other debts leaving just one monthly repayment.
Consolidating debts through this method therefore means that individuals pay just one, often lower, monthly repayment, rather than multiple repayments being made.
Using debt consolidation loans can be helpful to individuals who struggle to manage multiple repayments at once.
However, there are risks involved with this type of loan and so it is important for individuals to carefully consider all their options prior to implementing any borrowing plans.
Types of debt consolidation loans
There are a variety of debt consolidation loans available to individuals, including both secured and unsecured methods.
A secured loan is one type which uses an individual’s property as security, meaning that if monthly repayments are consistently neglected, then their property is at risk of being repossessed by the lender.
With a secured loan, individuals are typically considered to be a lower financial risk, which can result in reduced interest rates and higher loan amounts. However, this is dependent on other factors relating to the individual.
Another method that can be used to consolidate debts is unsecured loans, which do not take a property as security.
Instead, lenders will assess your credit score and other affordability factors to determine whether to lend to you or not.
Unsecured loans can be useful to individuals who are not a homeowner, and thus are ineligible for a secured loan.
Both secured and unsecured loans have risks, meaning that it is particularly important for individuals to assess their personal situation thoroughly before making any plans.
Debt consolidation loans: Is it a suitable option?
Consolidating debts may be beneficial to some individuals, as it means they will only need to factor in one monthly repayment.
This may give individuals the chance to effectively budget and could reduce the risk of them missing payments, which would positively impact their credit scores.
Furthermore, if these loans are properly researched, individuals may be able to obtain lower interest rates than their current loans.
Risks of debt consolidation loans
Although debt consolidation loans can be helpful, there are also risks involved.
One of the main risks is that taking out a loan incurs fees, which may result in the individual borrowing more money than their current debt.
Consequently, the individual would end up having a larger amount to pay back overall, which could put them into further debt than they were originally in.
Additionally, if the loan has a longer term compared to their previous debt, then the individual would again end up paying more overall through interest costs.
Debt consolidation loans may be useful to some individuals, as only having one repayment can be more manageable and easier to track.
However, like with any type of loan, there are risks involved with this strategy.
It is therefore important for individuals to carefully assess their options and seek professional help if they are unsure on the most suitable and affordable course of action.