Personal Finance | Interview Answers | Winning CVs | Beat the Recession

Personal Debt Consolidation Loans

Consolidating all your debts into one loan can either be an act of fiscal brilliance on your part or a financial disaster. Debt consolidation occurs when you take out a loan or other credit agreement in order to pay off two or more existing debts. You might do this via.

An unsecured loan
An advance from an existing mortgage provider secured against property but leaving the original mortgage intact
A second charge mortgage (a loan secured on property, from a lender other than the existing mortgage provider, that leaves the first charge mortgage in place)
A remortgage
The transfer of balances to a credit card (including the use of credit card cheques to pay off non-credit card debts)

When the UK 's Office of Fair Trading (OFT) investigated the debt consolidation market, it found that most of us do not shop around, even though this could save us money. Twothirds of borrowers who consolidated debts obtained information from only one provider. The OFT also found that many borrowers, particularly those in financial distress, are unaware of other alternatives, such as negotiating with creditors themselves or getting help from free debt counselling services. The OFT's final finding was that borrowers generally don't pay enough attention to the length of the term of the loan and the total cost of repayments.

So would debt consolidation be a good choice for you? It depends. If you're the sort of person who takes a perverse pride in telling your mates that you've maxed out your credit card (i.e. it's a boast not an admission of financial incompetence), then there's a real danger that you'll find yourself paying off the consolidation loan and still continuing to max out your cards. This of course puts you in double the trouble.

On the other hand, a consolidation loan will save you money (not to mention all the administrative hassle of paying off a number of monthly credit card statements) if you're extremely selfdisciplined and if you are prepared to steer clear of shopping outlets - real world and online.

If you're interested in pursuing the idea of debt consolidation a bit further, you should take steps to find out:

What debt consolidation is and what the alternatives are
What the interest rate and APR is and whether it's variable
What the overall cost of the loan is
What the monthly repayments are and what you can afford
Whether there are additional features which will change the rate at which the capital sum is paid back
What will happen if you miss a payment
What happens if you want to repay or refinance early
If the loan is secured on your home, what are the consequences of not keeping up with payments and what happens if you want to move at some point


Custom Search