12th May '08 - Debt Consolidation Loans - First Steps Towards Debt Help
Debt help, debt advice, debt consolidation loans, debt management plans, Individual Voluntary Arrangements (IVAs), and bankruptcy – they are all terms that suggest a problem with debt. Although they have been ranked here in order of the relative seriousness of the debt, there is nothing intrinsically wrong with debt itself. Rather, the key lies in managing the debt that almost all of us have.
Debt consolidation loans offer a prime example of this. Debt consolidation is often viewed as another weapon in the armoury of those struggling with a serious debt problem. In fact, it should rather be seen as simply a straight forward way of ensuring that debt is borne at the lowest possible cost. It is a way of ensuring that the lowest possible rate of interest is paid on outstanding debts. Debt consolidation loans, therefore, are debt reduction loans. As such, they are no more than a sensible way of managing our personal finances.
Would you rather be paying a typical 17% or so interest on the outstanding debit balance on your credit cards or a round about 8.5% on an unsecured loan? Of course, the sensible person would choose to pay half the rate of interest incurred by the loan rather than double the rate of interest paid to the credit card company. Debt consolidation loans are as simple as that. They involve taking out a loan at a lower rate of interest in order to repay assorted debts that are attracting a higher rate of interest. To this extent, debt consolidation loans could as easily be called debt rationalisation loans.
There are further advantages to debt consolidation loans. Once having chosen the period over which you wish to repay the loan, there is then a well-defined, fixed period within which your debt is repaid. This is a considerable advantage over the all too often open-ended borrowing through credit cards, where repayment of just the minimum amount required each month would often take many years to clear the debt.
Furthermore, repayments of the debt consolidation loan can be made by just one payment each month, rather than the several repayments otherwise necessary – and often falling due on different days of the month – on assorted other debts.
For a debt consolidation loan to be an effective debt management tool, clearly it needs to cost less to service than all the debts it is consolidating. Typically, there should be no fee for arranging an unsecured debt consolidation loan. However, if the debt consolidation loan takes the shape of a homeowner loan, secured against your home (and therefore potentially offering an even cheaper way of borrowing), there will almost certainly be the additional cost of valuing your home and an arrangement fee, both of which need to be taken into account when calculating costs.
Clearly, the rate at which you will be offered a debt consolidation loan will depend not only on whether it is a secured or unsecured loan, but also on your personal credit rating and history. Those with poor credit scores must expect to pay a higher rate of interest. Nevertheless, and higher interest rates notwithstanding, a debt consolidation loan can offer those with county court judgments (CCJs) against them or even those who have completed a term of bankruptcy an opportunity to rebuild their credit rating.
To conclude, debt consolidation loans are not only for use in resolving debt problems, but are a sensible way of normally controlled debt management. They offer the opportunity to:
- Roll several higher-interest debts into one lower-interest debt;
- Make just one loan repayment each month rather than several;
- Borrow on a secured or unsecured basis;
- Borrow at a rate commensurate with your personal credit rating.
This debt management article has been written by John Smith.
This article does not represent ‘financial advice’ as the individual requirements of each person will be unique to their own specific needs. If there is something in the article which you would like to rely on, please ensure you check those details with the person or business with whom you arrange a financial service.The views in this article represent those of the author and not those of Netbasic Limited.
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