The ins and outs of debt consolidation
By Emma Lunn, Moneyextra.com
2008
In a climate of rising interest rates, people with a number of loans and debts
with different companies might find they are struggling to pay what they owe
each month.
Debt consolidation companies tout debt consolidation loans as the answer. If you
watch daytime TV you will see a whole host of adverts from debt consolidation
firms suggesting that one quick phone call could be all it takes to solve your
money problems and, while you're at it, you may as well borrow a bit more and
spend it on a new kitchen or holiday.
* Compare rates on debt consolidation loans
Rising trend
The ads are clearly having a positive response. According to a survey by MSN
Money, nearly half of the loans taken out this year are for debt consolidation
rather than holidays or home improvement. Debt consolidation allows people with
a variety of credit agreements to 'consolidate' them into a single loan,
repayable over an extended period - and often secured against your property.
The interest rate is usually significantly lower than the rate charged on credit
card balances, but the sting in the tail is that because the loans are taken out
over a longer period of time, you end up paying more interest overall.
Your home (or wallet) is at risk
Most debt consolidation loans are sold to people who own their own homes and so
are often referred to as 'homeowner' loans or 'secured' loans. This means that
the loan is secured on your home and if you cannot pay it back your property may
be in danger of being repossessed.
Apply Now For Debt Consolidation
With unsecured credit agreements, such as personal loans and credit cards,
lenders have no such security and so charge higher rates.
Pros of debt consolidation loans
Despite their bad press, debt consolidation loans can be suitable in certain
circumstances. For example, they have lower rates than unsecured loans, which
could result in having to pay less each month. They can also offer longer
repayment periods than unsecured loans - up to 25 years and you can normally
borrow more money, up to £75, 000 compared to £25, 000 with an unsecured loan.
Secured loans can help you get back on top of your finances. They might be
suitable for people for whom remortgaging would mean paying early redemption
penalties or who have adverse credit and so would need to apply for a more
expensive sub-prime mortgage.
Cons of debt consolidation loans
However, they have their downsides too. The huge pitfall is that, if you default
on the repayments, you risk losing your home. You will also end up paying more
interest overall than you would have otherwise, especially if you take out the
loan over a long period. For example, borrowing £10, 000 at 8% APR over five
years would cost £2, 165.60 in interest payments but the same amount over 20
years would cost a very different £10, 073.60 in interest.
Rates on secured loans also tend to be variable, rather than fixed as with
unsecured loans, so the rate could increase when interest rates increase and/or
at the lender’s whim. Providers are also likely to try and sell you expensive
Payment Protection Insurance (PPI). Normally you can get a better PPI deal by
shopping around.
Once credit cards and other debts are reduced to zero, you might be tempted to
start spending again which defeats the point of debt consolidation.
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Alternatives to debt consolidation loans
Anyone who is in debt crisis should go to seek help from one of the free debt
counselling charity services like the Consumer Credit Counselling Service,
National Debtline or the Citizens Advice Bureau. These organisations can help
you assess your money problems and advise on the best course of action. They may
also help you work out a budget that enables you to pay back your debts as
quickly as possible.
If, after assessing your financial situation, you decide that some kind of loan
is the best option for you, there are a number of alternatives available. As
well as banks and building societies, there are a raft of loan companies on the
market, some of which operate solely online to keep costs to themselves and
borrowers to a minimum, so it's a good idea to shop around.
In some circumstances, debts can simply be moved onto a mortgage at a much lower
rate and possibly with the facility to pay it off more quickly. Alternatively
you could transfer credit card balances to cheaper cards such as those offering
a 0% interest period.
Apply Now For Debt Consolidation
Courtesy:
http://money.uk.msn.com/loans/loans-guide/article.aspx?cp-documentid=5817804
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