Debt consolidation means combining more than one debt obligation into a new loan with a favourable term structure such as lower interest rate structure, tenure.
Key Features of Debt Consolidation
Debt consolidation is the process through which a borrower finish and combines several loans into a single one to receive the benefits of a lower interest rate or a reduced and rotative payment or maybe both, this leads to a reduction in his liability and brings in an ease in the management of the loans. The borrower would now have to make one payment instead of making multiple payments to other creditors.
Debt consolidation can happen on debts which are not tied up to an assets. Education loan, amount owed on credit card, personal loan are some examples of unsecured loans which can come under debt consolidation.
The advantages of consolidation loans
- By repaying over a longer period, your monthly payments will come down.
- Your home is not in risk if you can keep up payments.
- Friends, colleagues and family don’t have to know about it.
Is debt consolidation that easy?
When considering your application, factors that are considered are- Will the loan clear all your debt, your credit rating and any defaults that you may have, your income and outgoings including debt payments plus if you are a homeowner the value of your property and how much is outstanding on your mortgage. If you are already struggling with debt or have a poor credit rating, the rate of interest charge could be high. This may mean that you pay back far more than you originally owed over a longer period of time as well. You also need to consider what might happen in the future. What happens if you lose your job, or interest rates go up. It makes sense to compare the total you would pay with a loan compared to a debt management plan or possible an Individual Voluntary Arrangement. If you take out an unsecured loan and cannot meet the payments, the total you will owe will not only include the loan but all the interest payments outstanding as well.
Consolidating debt through a secured loan
Consolidating unsecured debt into secured debt could mean that the debt is repaid for periods of 25 years or longer, which will result in much higher interest payments. Once the debt is secured it is not possible to include the debt in a debt plan which could include debt forgiveness. Also a secured loan place your home at risk if you find in the future you cannot afford the payments. Your home may be repossessed if you are unable to keep up with your payments. Most second mortgages do not allow you to transfer your secured loan to a new property. However, 1st lenders frequently will allow your existing mortgage to be transferred to a new property.