With the rise in popularity of personal loans, more and more individuals have started borrowing money from banks in order to pay for products and services that they may not be able to afford otherwise. Although most lenders offer flexible loans that have low-interest rates, which should be relatively easy to manage, taking out multiple ones at the same time can make your debt very expensive. This issue is especially difficult to handle in the case of variable-rate loans.
Regardless of the reason that pushes an individual to take out multiple loans, it is important to keep in mind that there are ways to reduce the cost of the debt. As a solution, most people choose to refinance their loans. However, debt consolidation is usually more affordable and easier to access. Here is what you know about debt consolidation loans and how they can help you reduce the cost of your active loans:
What Is a Debt Consolidation Loan and When Is It Useful?
Debt consolidation loans are designed to help you transform several different types of debt into a single expenditure. For example, if you have a credit card that you have maxed out, a £10,000 personal loan that you are currently repaying, and other types of personal debt, you can consolidate all of it using a single loan.
Debt consolidation loans enable you to merge multiple types of debt, each with different terms and conditions, into a single one that usually has a lower interest rate and spans over a greater period of time. Most lenders offer these, and they usually have fixed interest rates, making them easy to repay.
What Are the Advantages of Debt Consolidation Loans?
Debt consolidation loans are the best way to minimise the cost of your existing debt. However, this is only one of their advantages.
- One single payment – If you have 4-5 types of debt that you have to pay, you will have to make 4-5 monthly payments. This means that you will have to make multiple transactions on different days, which can make it difficult to keep track of things. With a debt consolidation loan, you only have to make a single payment per month;
- Lower interest rates – Debt consolidation loans are great ways to get rid of variable-rate loans that may have become too expensive to handle. They have fixed interest rates that are relatively small when compared to other types of debt;
- Great for secured loans that put your property at risk – If you are close to finishing the repayment of a secured loan but are running out of money, you can use a debt consolidation loan to make the final payments and only focus on repaying this single debt in the future;
The Risks and Disadvantages of Debt Consolidation Loans
As useful as these loans are for individuals who find themselves swarmed with monthly repayment instalments, they can be difficult to obtain, especially if you have a poor credit rating. Although most lenders offer them, the fact that they involve very large amounts of money makes the loans have strict requirements. These differ from one lender to another, but in most cases, you will have to have a good credit rating or offer a high-value property as collateral.
This brings us to the main disadvantage of debt consolidation loans. They are always secured, which means that if you are ever unable to make the payments for them, the lender will be able to take possession of the property that you’ve offered as collateral.
Debt consolidation loans are great tools if you have multiple loans that you’ve got to pay and cannot keep track of them. They are also effective at lowering the cost of your debt and giving you more wiggle room if any of them are approaching their term and you are unable to repay them on time. However, a debt consolidation loan is a long-term commitment. Give it a lot of thought before applying to one.