Thursday, 23 July 2009

Beware of debt consolidation

posted by debts.org at 02:41

A consolidation loan is when all of your debts are lumped together, and you only pay off one amount each month. A consolidation loan, in effect is a replacement debt, and you need to make sure the loan offers a much lower rate of interest than your current debts are costing you. Amalgamating your loans is not clearing them.


It is estimated that around 80% of people who take out consolidation loans go on to run up further debts. Be sensible and make sure you are one of the 20% who take out a consolidation loan sensibly and having read the small print. One of the biggest problems with consolidation loans is that, once they have been used to pay off your credit cards for example, your statement will then show you owe the credit card company nothing. It is very tempting to start racking up bills on credit again, which will leave you in a worst financial position than before you took out the consolidation loan.


Consolidation loans and debt helpWhen looking for a consolidation loan, the first thing to consider is the interest rate you will be charged – make sure you shop around and find the lowest one available. Never borrow more than you need. It may be tempting to borrow a bit extra for that special holiday to celebrate getting your creditors off your back, but you will end up paying back the extra credit with plenty of interest.


Flexible consolidation loan for debt problemsTry to get a flexible debt consolidation loan, so that you can pay off more than the required amount if you have an increase in salary, or find yourself in a better financial position than before. Some consolidation loans will charge penalties if you pay them off early, so make sure you are aware of this before signing anything, or ask for a more flexible loan.


Secured and unsecured consolidation loansConsolidation loans can be secured or unsecured, but think very carefully before taking out a secured consolidation loan. If you default on payment with a secured consolidation loan you could lose your house. A secured loan may offer a lower interest rate but think of the consequences if you fail to make the repayments. Even if you have the slightest concern about defaulting on a secured consolidation loan, don´t do it.Payment protection insuranceAlthough your lender will probably try to persuade you to take out payment protection insurance, think it through, as this will add a considerable amount to your consolidation loan.


Payment protection insurance is to protect the lender, in case you are made redundant, lose your job or become ill and unable to work. Often this insurance does not come into effect until a few months after you are unable to pay the loan, so make sure you think it is worthwhile before agreeing to anything. You may be sold the insurance policy as giving you ´peace of mind´, but you will also be paying for the ´peace of mind´ of your lender and insurer.Avoid more debt by paying back quicklyWhere possible, attempt to pay back the loan repayments as quickly as possible. The longer you take to pay off your loan, the more interest you will pay, and the less motivated you will be to clear the debt.


Always take your time to shop around and don´t be tempted by those shocking adverts for loans with high interest, inflexible terms and conditions and high pressure sales tactics. You could end up with having your house repossessed if you don´t take your time to choose the right consolidation loan for you. A consolidation loan is a long term commitment, so make sure you choose it carefully.