A debt consolidation loan normally involves grouping together all your loans and debts and putting them into one debt or loan. This new loan is usually a fixed rate and cheaper than the previous combined total.
How Does Consolidation Work
A person can have a few loans and these are then paid off by having one large loan.
It is normal practice for the requirement of some sort of asset to act like a guarantor, whether it is a car or property, it gives the loan company something to remove to pay off the debt if the customer does not keep up with the payments.
Pros
If you have acquired credit card debt or personal loans even student loans you might be able to consolidate into one loan with a lower payment than all the loans separately.
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If the credit gets difficult to manage you can end up paying more with late payment charges and interest adding to the debt. This will all affect you credit rating, meaning loans become difficult to secure and if you do manage to secure loans interest rates could be higher.
Consolidating your debts will put you back in control; you will have one monthly payment to make, putting you back on track to having a good credit rating.
Cons
Sometimes when you look at consolidating your loans it might not make you any better off, the interest rate might not be as favourable as you hoped. The payments can sometimes be more than what you are originally paying, when you add all your debts together.
Loan repayment might be over a longer period of time, if originally you hoped to pay of your debts in a year a consolidated loan might take three years to completely pay off.
If you secure you debt on an asset, like your home, the lending company are legally allowed to make you sell this asset if you do not keep up with the repayments.
The perfect solution
The best way forward is to get some professional help from a financial advisor who can help you make the right decisions. Some forms of debt consolidation can impact you further down the road. So you will need to make the best and most informed decision that you can.
If you are in real financial difficulty then debt consolidation might be the right path for you to take. Finding a lender who will provide you with the right loan at a good interest rate is a start.
Normally debt consolidation is used with clients who have credit cards or multiple cards with high balances and often high interest rates to go with them and consolidation can elevate this pressure, putting you back in control.
Final Word!
Look at how far you have come, with understanding where you have gone wrong and what you need to do to move forward. Try and move forward positively and learn some skills to prevent repeating this cycle.