Juggling many different creditors each month can be a hassle, not to mention stressful. It can be difficult to keep account of all your outgoings, and dealing with numerous fines or warning letters, if payments are late, can only add to the anxiety of the whole situation. For these reasons, many debtors apply for a consolidation loan to simplify the process. In this article we are going to take a look at exactly what a consolidation loan is and what its advantages and disadvantages are.
What is a Consolidation Loan?
Consolidation loan firms offer those with numerous debts the opportunity to amalgamate all of their debts into one easy payment. By agreeing to this, the debtor allows the consolidation company to pay off all of their debts on their behalf. This then becomes a single new debt which the debtor pays off over an agreed time-frame and at a, hopefully, reduced interest rate.
The Advantages of a Consolidation Loan
There are a number of advantages associated with consolidation loans. These include:
- Simplicity: A debtor no longer has to juggle numerous debts or creditors. It frees up time spent trying to keep track of everything at once.
- Monthly Payments: Normally, a consolidation loan is paid off monthly. One monthly payment is far more manageable than other debts having to be paid off at different times every week.
- Lower Interest: There isn’t much point in taking out a consolidation loan if it’s going to cost you more money. Usually you should be able to find a consolidation lender who can offer you an overall lower interest rate than your current debts combined.
- Positive Goal: Having one payment to make is a more motivational goal than several smaller payments. Consolidating your debts can really give you something to aim for.
The Disadvantages of a Consolidation Loan
Unfortunately, there are also a number of disadvantages associated with taking out a consolidation loan. These include:
- Secured Dangers:Most secured consolidation loans are usually secured against a property i.e. your house. If you have any problems paying the debt then your home could be at risk of repossession.
- Longer Loans: Often a consolidated loan is paid back over a longer time period. This means a debtor is saddled with debt for longer, and probably pays back more money than they would have otherwise in the long-term, even though the debt payments per month are lower.
- Poor Credit: With a a credit history a debtor is normally restricted to consolidation loans with much higher interest rates.
- Temptation: Debtors often find themselves in trouble again when they see that their credit cards have been cleared by the consolidation loan. Sometimes people end up using their cards again and paying back the consolidation loan on top of that.
A Good or Bad Idea?
As with any financial decision, it is critical that a person researches the consequences of taking out a consolidation loan as much as possible. Only once weighing up the pros and cons, and taking into account your own specific situation, can you truly make the right choice.