Debt consolidation loans
Debt consolidation loans are not really any different to
unsecured or secured personal loans (a debt consolidation
loan may be either), except for the fact that they are promoted
specifically for the purpose of consolidating all of your
debt payments into one single monthly sum of money.
Essentially, the debt consolidation company will buy up
all of your existing credit agreements, loans, credit cards
and other debts and bundle them into one. The rate of interest
is likely to be lower than that payable on your store cards
and some of your credit agreements, but the real reason
that the repayments appear so much lower is that the agreement
is to pay them off over a longer timeframe.
A longer term means that you may well be paying just as
much or even more in terms of long-term interest, so it
may not necessarily be to your best advantage. However,
many people find that the sometimes-drastic reduction in
terms of monthly outgoings is well worth it, though you
should shop around to get the best deal in terms of interest
rate, term, flexibility and charges.
Consolidating your debts helps to focus your attention
on reducing a single debt as opposed to several smaller
ones. Typically the interest charged on the one loan should
be lower than the average of all your other debts beforehand.
However, this is only the case if you are disciplined and
stick to the consolidation plan. Unfortunately, debt consolidation
loans have the greatest appeal to those with a less than
perfect credit record, which makes them more vulnerable
to the temptation of taking out further credit elsewhere
once their existing debts have been bundled into one package.
In short, a high proportion of people who take out loans
to consolidate their debts go on to amass further debts
before they've cleared the first lot. It may be tempting
to go on a bit of a spree when your credit card is cleared
again, but that is the worst thing that you can do and you
should only take out this type of loan if you can be sure
that you will stay on the straight and narrow.
