Juggling multiple debts can be tiring and stressful. Credit cards, household bills and overdraft and loan repayments all mount up, and it can be hard to keep on top of it all. If you are struggling to pay back a number of different forms of credit, it is relatively simple to consolidate debts with a debt consolidation loan. Although taking out yet another loan can seem counter-intuitive, if you use it sensibly, it will help you to get on top of your debt problem and to feel in control of your life and spending once again.
What Is a Debt Consolidation Loan?
A consolidation loan is a large loan that is used solely to pay back a number of smaller loans. As a result, you only have to pay back one large debt on a monthly basis rather than several smaller ones. The advantage of this is that it is much simpler to cope with and, significantly, it can often save you money. Credit cards, store cards and unauthorized overdrafts usually come with relatively high rates of interest. In contrast, lower interest rates are often available on larger loans and at fixed rates. By borrowing a larger amount at a lower interest rate to pay off all your smaller debts, you consolidate those smaller, more costly debts into one larger and, more often than not, cheaper debt – this is a debt consolidation loan.
What Are the Advantages?
If you are overwhelmed by debt and finding it difficult to remember who to pay back and when, the most obvious advantage of a consolidation loan is that life becomes much simpler. You are effectively putting all your debts in one basket, which means that you only have to make one regular fixed payment each month rather than several different payments, often at variable rates of interests.
Budgeting becomes much easier because you know exactly how much you have to pay back each month and, therefore, exactly how much money you have left over to spend on other essentials. Perhaps the biggest advantage of all is that you may find that you are paying back less than you were before you took out the consolidation loan. Your single payment may be less than the sum total of all your previous smaller debts because you are paying a lower interest rate. A final advantage is that a consolidation loan can help you to improve your credit rating. If you have fallen behind with loan repayments, your credit rating will have suffered. A consolidation loan can help you to prove to creditors and potential lenders that you are a reliable and trustworthy borrower. The way to do this is to make sure you make each monthly payment on time and do not take out any other forms of credit until you have paid the loan back in full.
What Are the Disadvantages?
Always look very carefully at the terms of the consolidation loan you are considering. How long are you borrowing the money for? What is the rate of interest? Although you may find that you are paying a lower interest rate than previously, this is not always the case. If the interest rate is higher than for many of your smaller loans, a consolidation loan will be a more expensive option for you. Consider too the number of years it will take you to pay back the loan. It could be that you will end up paying back much more with one consolidation loan than with a number of smaller debts if you agree to borrow the money over a longer period of time.
Never be tempted to borrow more money than you need. The idea is to wipe out your debts as quickly and cheaply as you can, not to accumulate fresh ones.
Should It Be Secured or Unsecured?
Debt consolidation loans can be secured against your home, but this is not a good idea if you think you might struggle to meet the payments. Secured loans usually offer lower rates of interest but should only be taken on if you are absolutely sure you will be able to pay back the loan. If you cannot, you may lose your home.