If debt is the question... is
consolidation the answer?
By Karen Beavis, MoneyExtra
2008
With interest rates rising and the credit crunch driving up the cost of
borrowing and putting banks at risk, is debt consolidation still a good idea?
A snapshot poll by MSN Money suggests that since the beginning of this year,
almost half of all personal loans have been taken out for debt consolidation
rather than for
'extravagances' such as holidays or cars. Record debt levels
have been made all the more painful by the five base interest rate increases
between August 2006 and July 2007.
The Financial Services Authority has calculated that a million of us regularly
fall behind with payments on credit cards and bills, which can reflect badly on
your credit
record. Citizens Advice says that over the past year, the number of
enquiries it received over indebtedness has jumped by 20% to 1.7 million, more
than double the figure ten years ago.
* Check your credit report for free
Overdraft, credit card or personal loan?
If you are struggling with your monthly financial commitments, consolidating
debt into one loan or credit card with one monthly payment may help you budget,
stop you missing payments and perhaps even help you
sleep at night.
Before you latch onto the first loan you see advertised as the debt
consolidation answer for you, you need to work out how much you owe in total
excluding any mortgage; what the current monthly bill is for all your debts;
what interest rates you are paying; and if you think you can carry on meeting
your commitments.
Once you have a balance for your debts, you then have to work out how much you
could comfortably afford to repay a month. You can then choose a loan product
that's right for you.
Apply Now For Debt Consolidation
With so many options for consolidating such as into your current account
overdraft, onto a credit card, via a personal loan - unsecured or secured - or
into your mortgage, it can be a hard decision to make.
The advantage of putting all your debts into an overdraft is that it is
flexible. You can repay the debt at anytime without penalty or borrow again when
you need to.
The downside is that it's up to you to be disciplined to make sure you do repay
it. Interest rates on overdrafts vary from 0% on special deals to 10.5% but
beware of going over your agreed overdraft limit because you
could find yourself
being hit by penalty charges and a penalty rate of interest that could be up to
three times more expensive.
* See this week’s cheapest overdraft deals
Go for a 0% credit card?
Consolidating all your debts into a 0% credit card is marvellous, if you can get
the balance you require. Do remember you will need to keep making the monthly
payments during the 0% interest period. There are a number of zero-rated cards
on the market for balance transfers.
However, watch out for the transfer fees - these are where both football clubs
and credit card providers make their money.
You also must be disciplined to make sure you repay your debt within the 0%
offer period otherwise you can end up paying around 15.9% or more.
If your outstanding debt balance is a little on the large side, you might find a
personal loan more manageable. There are two different types available - one is
unsecured and the other is secured against your home meaning
that if you get
behind with your payments, your home could be at risk.
* Check out the best 0% balance transfer deals on the market
Is a personal loan the answer?
The advantage of an unsecured personal loan is that the interest rate is fixed
so you know exactly what you will be paying each month over the term of the
loan.
Halifax said that it doesn't expect interest rates on unsecured personal loans
to rise because they are priced over the long term and are not affected by the
money markets. Its current rate on its personal loan is typically 6.9% if you
apply online and 9.9% if you apply in a branch.
At the moment there are plenty of personal loans to choose from and its worth
shopping around especially online to get a low interest rate.
* The cheapest unsecured personal loans on the market
Long term debt is costly
With a secured loan the interest rate is variable and you may choose terms from
six month to 25 years. However, the longer the repayment period, the more your
secured
loan will cost. Or you could consolidate debt by rolling it into your
existing mortgage.
In both cases you are turning short-term debt into long-term debt, which will
cost you more in interest. However with a mortgage most lenders will let you
repay a certain
amount extra each month or a year without penalty, which enables you to reduce
the term of the loan and the amount of interest you pay.
Apply Now For Debt Consolidation
Courtesy:
http://money.uk.msn.com/loans/loans
-guide/article.aspx?cp-documentid=6216893
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