What is
a Debt Consolidation Loan ? - it is not unusual today for someone to find themselves in a
position where they owe money to a number of different creditors. For example
many people look into their wallet or purse to find multiple store card, credit
card and catalogue account cards.
For some people, having to make multiple payments to
different creditors like these is time consuming and inconvenient. They would
prefer to consolidate all their debts into one and have just one monthly
payment to worry about. Others consider the annual rate of interest charged by
store cards, catalogues and credit cards. This tends to be much higher than
the rate of interest charged on a personal loan by a high street bank.
A consolidation loan can be the answer to this problem. All
the different card balances and even smaller loans can be paid off with the
single loan. This will often offer a single monthly payment which is lower
than the combined total of the different cards. The loan will normally be
payable over a fixed period meaning that it is clear when the debt will be
repaid in full.
When Should I Consolidate My Debt?
- taking a decision
to consolidate debt must NOT be taken lightly. There are a number of factors
which must be considered very carefully.
-
Can I borrow enough to consolidate all my debt?
- The most important thing to remember when consolidating debt is to
consolidate everything. The advantages of consolidation may be lost if after
taking a loan, and paying off some debts, you still have outstanding
balances on other cards or catalogues. Therefore it is very important to
understand exactly how much money you owe to your different cards and
catalogues.
-
How Much Will I Actually Repay? - When borrowing a
loan, people do not usually stop to think how much they will actually repay
including interest and payment protection charges. Clearly, if you borrow
£10,000 in cash from your bank, you will not just have to repay the £10,000.
The bank will also add interest and charges for any payment protection
plans. Therefore you will certainly repay more than the £10,000 you
borrowed. The question is how much.
-
What Monthly Payment Can I Afford? - Clearly, many
people try to consolidate to reduce the total monthly cost of their
borrowing. However, very often, individuals decide to take a consolidation
loan without first considering how much they can afford each month. It is no
good taking a loan only to find that the monthly re-payments are too high.
This will mean that in trying to make the loan payments, you will start to
struggle in other areas like paying for the weekly shopping. Before you know
it, you start to use the old credit card accounts again and the balances you
paid off with the loan reappear. Only now, the situation is worse because
you also have the loan payment as well.
-
How Long Should My Repayment Period
Be? - most banks will offer different periods
over which a loan can be re-paid ranging between 12 and 60 months (or in
some cases even longer). In general, the shorter the repayment period,
the higher the monthly payment will be but the lower the total amount of
interest. Clearly, most people want to be in a position where they can
repay their loan as quickly as possible, however, this will depend on
how much you can afford to repay each month.
-
After Consolidation, Cut up the
cards! - the greatest mistake made by
people who try to consolidate their debts is that after the
consolidation process, they do not cancel their card accounts. It is all
too easy to say, “I will not use my card, but I will just keep it in
case of a rainy day.” The problem is that the temptation to use our
credit cards is often too great.
Should I borrow Against My Property - Secured Borrowing?
- if you have a property, you may find that you have equity. Equity
is the difference between the total amount owed on the mortgage and any other
secured loan and the current market value of the property. In today’s
environment of increasing house prices, many people are finding that they do
indeed have significant equity. It is therefore possible to release this in
the form of cash either through an extension of the mortgage or a secured
loan.
Borrowing money against your property can be
an extremely good way of consolidating debts. Very often you will be able to
borrow more then you would be able to with an unsecured loan from the bank.
The monthly repayment could also be significantly lower as a mortgage is
normally paid over a longer period of time (often 15-25 years). However,
remember a mortgage or secured loan is borrowed against your property. If you
borrow and then are unable to maintain the monthly repayments, your property
may be at risk of repossession by the bank.
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