Consolidating your debts brings everything under a single borrowing, one big loan which is used to pay off all other lending and, hopefully, to save some money.
Benefits and risks
Debt consolidation loans give you the chance to combine all of your existing debts into a single monthly repayment. While this is unlikely to reduce the overall amount you owe, it can be helpful in a number of ways.
Firstly, having all of your debt in one place may make it easier to manage. It is sometimes easy to lose track of the total balance of debts owed to many different providers, while a single consolidation loan gives you a clear figure for how much is left to pay back.
Secondly, most lenders say their interest rates are around the seven to ten per cent mark. Compared with usual credit card interest rates of up to 17 per cent, this could mean substantial savings on interest payments alone, leaving more funds to pay off the actual borrowing.
Getting the right provider
There are two main aspects to choosing a provider for your consolidation loan.
The first is finding a deal that suits you. Online tools can help by searching available packages to find the one which requires the minimum total spend.
The second issue arises if you have a bad credit history, where it may be difficult to get the loan you want as many lenders will only provide their best packages to customers who are unlikely to default on repayments.
If you have any assets, such as a house or a car, a secured loan may be a suitable option. This gives the lender the security of knowing they can repossess your property if you do not keep up repayments.
While a secured loan does put your property at risk, it may be the only real option for those with a bad credit rating who are certain they can afford the monthly payment.
