08 Feb What is debt consolidation?
Should I Consolidate My Debt?
Welcome to another Badger blog post. This week we’ll look at what debt consolidation is and whether it’s a good thing for you or not.
To begin with, let’s define exactly what debt consolidation is. Debt consolidation is the act of merging your existing debt into one place. In other words, bringing together multiple forms of credit (loans, credit cards, store cards) in one loan. This is to reduce your repayments and pay off your debts.
Not to be confused with, although it often is, debt management. This is the act of bringing all your debts together to negotiate with your creditors. This is done to make the repayment more affordable, pay off and write off some of the debt.
Therefore, the first thing to do is decide which route is best for you – take out another loan that comes with more interest and a larger amount to repay. The downside is that monthly repayments should now be lower if you have benefited from lower interest rates. Or negotiate with your creditors to get some of the debt forgiven, plus the option to pay off less.
If you’re not sure which way is best for you, check out the debt charity Stepchange’s website who gives good advice on choosing which option.
Choosing the right loan
For our purposes, let’s assume that you have chosen to take the path of debt consolidation. What happens now? Remember that all loans are essentially the same. Or secured against a property or unsecured and therefore not insured against anything. The only difference between the two is the rate, duration and amount.
Historically, consolidation loans have been viewed by lenders as being on the riskier end of the spectrum. This is due to the inherent implication that someone who needs to consolidate their debt may not be very good at budgeting their money from month to month.
This may mean that the rate you will be charged may be slightly higher than what you would expect from a brand new one-time loan. More risk equals higher rates equals higher payments.
This is the trap that unwary consumers fall into. It can mean that you only get one loan, but pay more for it than for your previous 4 loans. Not good. Therefore, always check whether your new payment will be lower than the total of your previous payments.
How to find a lender
Finding a lender to give you a consolidation loan should be one of the easier items on your to-do list. There is a abundance of lenders all of which are vying to help you put all those loans in one basket. You should not look for someone who specifically advertises debt consolidation loans because your choice is wider than that.
Almost all personal loan Lenders will have a range of options on their application form to ask you what the loan is for. Debt consolidation will be one of those choices. Instead of opting for an advertised rate, try opting for a lender that offers it as part of their overall product package. You may get a better rate. Consolidation loans are not always favorably rated by lenders, so advertised products may be subject to a higher rate. It doesn’t always work, but might be worth a try.
That’s it for consolidation loans. We hope you found this interesting and found something worth picking up. Until next time.
Looking for something else? – try this one.