Are consolidation loans a bad idea?
We’ve all seen the ads charming you into ‘switching your debts into one, affordable lower monthly payment’ but are consolidation loans a good idea?
When you have a multitude of debt and creditors are holding out their hands in every direction, the simplicity of simply rolling all of your debts into one affordable, monthly payment can seem like heaven. You get your creditors off of your back and can simply relax, knowing that you only have to find one fixed sum per month for the life of the consolidation loan.
A consolidation loan is an ideal debt solution for many people as long as it is used properly. Many people fail to read the small print or do not look at the wider picture. Don't start a consolidation loan until you've investigated all your options, as something like an IVA may be more suitable.
It has been estimated that seven out of ten people are able to pay off their debt consolidation loans early but fail to realise that early settlement can incur penalty charges. Secondly, people using debt consolidation tend to run up other debts beside the loan. The temptation of a new credit limit on those nearly cleared credit cards is hard for many to resist.
When looking for a debt consolidation loan, make sure that the loan is flexible so as you are not charged a penalty fee for settling early. Another good idea is to make sure that the loan is unsecured so as you do not risk losing your home, if you fail to keep up repayments. Also make sure that the loan is offered at a fixed interest rate and avoid payment protection insurance at all costs. PPI substantially adds to your monthly payments and is rarely ever used.
When shopping around for a loan, treat it as though you are shopping around for a new product for the home. Compare Annual Percentage Rates and the Total Amount Repayable as lenders calculate interest in different ways. By doing some much needed research beforehand, you will know exactly how much you will need to pay each month and can rest assured that there are no hidden surprises.
Consolidation loans are the perfect debt solution for people who are serious about clearing debt and maintaining a clean credit rating. If you do not trust yourself to use your credit cards, cut them in half or avoid debt consolidation altogether as this form of debt help is only intended for those who understand the importance of being responsible with money.
