Things to consider before opting for debt consolidation
If you have debt problems, you may have long considered the possibility of applying for a debt consolidation loan. There is certainly no lack of such firms to be found online, with many of them making promises to dissolve your debt problems by giving you the option to repay existing debts via a single, affordable monthly payment rather than multiple repayments.
There are several forms of such loans, however, meaning that you will have to educate yourself before you apply.
The many types of debt consolidation loan
Unsecured consolidation loans, for example, tend to be most suitable for those whose debts are relatively low – for example, under £10,000 - and who also have a reasonable credit history. If you consolidate your debt this way, you will have just one, normally lower, monthly payment. On the flip side, you won't have as much freedom to negotiate later if you later find it difficult to make repayments, as you won't have multiple creditors.
A secured consolidation loan, meanwhile, is the most common type of consolidation loan, and is only available to homeowners who have at least 25% equity in their property. It normally results in multiple unsecured loans being combined into one secured loan. Although this loan type results in reduced monthly repayments and interest rates, it does introduce the risk of your home being repossessed and more in total interest is expected to be repaid over the long period of the loan.
Consolidation remortgages and debt management
Other popular options for consolidating debt include consolidation mortgages, which are similar to secured homeowner loans except that the entire loan is refinanced rather than a second loan taken out.
For many people, though, the only option for many people when it comes to consolidating their debts is debt management, which involves debts being consolidated into a single payment made to the debt management company. This firm, in turn, distributes monies pro rata based on the amount that all creditors are owed.
Also popular with those with debts exceeding £12,000 are individual voluntary arrangements, which involve a substantial amount of debt being paid off over five years.
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There were similar concerns raised over the use of email marketing by some debt management companies.
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