There are several reasons to like joining together your debts into a single debt consolidation loan. Even the term ‘consolidation’ is reassuring for some people. It invokes the thought of getting rid of a lot of small and some not so small problems and amalgamating them into a single controllable issue. Rather than having a great number of lenders to deal with, the debtor can have just one financial institution to manage and merely just one monthly repayment to make in contrast to having to make numerous payments to a number of creditors for various sums. Consequently the debtor thinks that taking care of money affairs might become simplified. One other main expectation is that the debtor’s credit ranking can improve significantly once all personal debts particularly credit card obligations are lumped into the loan consolidation. Each and every one of the old credit card accounts gets paid off completely. To crown it all, the regular monthly repayment on the loan consolidation will with any luck , be a good deal lower than the entire amount of the payments on all of the previous debts – credit cards, overdrafts and personal loans.
Well, that is the principle in any case. One thing to appreciate is how come monthly payments decrease at all. It is not actually the benevolence or kindness of the new debt consolidation loan supplier which is the root cause for this drop. There are frequently several factors at play. One element is usually that the time frame of the consolidation loan may be (a lot) lengthier than the durations of the original loans. For instance, had the debtor continued servicing each of the current loans (instead of lumping them all into a debt consolidation loan), then he or she might well have paid a number of them off rather quickly and others over a lengthier amount of time. A second issue is that the lender of the debt consolidation loan might possibly seek to secure the funds advanced on the debtor’s property, often the family dwelling. If this is so, the loan provider has significantly minimized the financing risk that the debtor will go into default on repayments since the lender will ultimately rely upon the collateral in the property to satisfy the unpaid debt if necessary. Lower monthly repayments are likely to be dependent on one or both of these considerations. While the rate of interest on the proposed consolidation loan might possibly be more affordable than the rate the borrower is currently having to pay on some balances at present, the total sum repayable during the entire timeframe of the loan consolidation could very well be considerably greater in comparison to the amount of money currently payable under the old loans.
Let’s see what can not work right by taking out a consolidation loan. Should you be finding it hard in making your repayments at present you need to be sure you can comfortably make the debt consolidation loan repayments in a sustainable manner and for the full time of the estimated term. You should stop using the credit lines that you have been using. For example, it is best to chop up your credit cards since the loan product providers may, now that you’ve cleared the account balances, tempt you to carry on using the same credit cards that got you into trouble first and foremost. Furthermore you will need to cease utilizing any overdraft account facilities which unfortunately contributed to your financial challenges to begin with. Since most of your disposable income will have to go to repay the loan consolidation you will need to limit your access to other credit even when your ‘old’ loan companies might want to do further business with you and make various ‘attractive’ credit proposals to you. You’ll want to withstand such deals, if you want to avoid struggling financially over again.
One more problem is that when you have consented to secure the loan consolidation on your house and find that you are not able to keep up the repayments, you could possibly lose your own home. Although you may well obtain a low interest rate on the consolidation loan by agreeing to secure it on your house, the likely more lengthy duration of the loan consolidation means that you give up some freedom with regards to your home finance loan e.g. you will not be mortgage-free as soon as you expected to be and you may be unable to give up work as early as you had targeted to do.
So, do reflect long and hard before you plump for consolidating debts. Look at other options that may be appropriate in your circumstances. For instance you ought to investigate whether you could be insolvent. If you happen to be insolvent, a couple of the options you might need to contemplate are possibly to go into an Individual Voluntary Arrangement (IVA) or to petition for your own Bankruptcy (BCY). Those are two personal insolvency processes that protect you from your lenders and that also are supported by the full weight of the law behind them. Even if you are not insolvent, you might like to have a look at entering into a Debt Management Plan (DMP) with your lenders. You can do this yourself by getting agreement with each of your lenders individually as to how you will repay your debts to them. This is occasionally termed as a self administered DMP. Most DMPs however are carried out with the assistance of firms which specialise in arranging DMPs between consumers and their creditors and which then manage these plans over a period of years. Whatever you decide on, do take guidance. Steer clear of debt consolidation until you have an understanding of and have thought about all your other options.