Taking actions before your debts become a serious issue is an essential part of debt management. Often, people think that there is no solution to their debts, and they ignore them instead. However, this can lead to further problems in the long-term. Fortunately, there are options available to help you cope with your debt. One option that is available is debt consolidation. The following is some important information about how debt consolidation works and how it can impact on future credit applications.
What is Debt Consolidation?
Some people have several different types of debts, such as loans, an overdraft, and borrowing on credit cards. Debt consolidation involves taking out one loan to repay all your existing loans. This means you make one monthly repayment instead of several, which many people find easier to manage and keep track of their debts.
What Are the Pros and Cons of Consolidating Your Debts?
To decide whether debt consolidation is right for you, it is important to consider all the pros and cons of this decision. The main reason that many people choose to consolidate their debts is so that their monthly debt repayments are reduced. The other major reason is that managing and tracking one debt repayment is so much easier and less stressful.
However, not all debt consolidation repayments are less than the total repayments for several debts. Therefore, it is important that you add the repayments of your existing loans to check the repayment of a consolidated loan is lower. If not, it is possibly not worth you considering debt consolidation.
Another reason debt consolidation is an option worth considering for some people is the lower interest rates. It is important to note that lower interest rates are not always available for everyone as several factors are considered, such as your creditworthiness. Also, although lower interest rates can lower repayments, there are other factors involved in the cost of repayments.
The repayment period is also a significant consideration. Even if the monthly repayments are lower, you will ultimately pay more if the repayment period is longer. Any fees can also impact on the monthly repayments and the total you will repay. It is vital to check if there are any upfront or hidden fees attached. If there are, the loan is potentially more expensive than you had expected.
There are different types of debt consolidation loans available, one of which is a form of secured loan. This means that the lender uses your assets as a form of security against your debt. If you own your own home, it is usually your house that is the asset used as security. If you fail to make your loan repayments, it is possible that your home could get repossessed. Those who intend to take out this type of debt consolidation loan should get expert advice before proceeding.
The Alternatives to Debt Consolidation
Debt consolidation is not the best option for everyone and its possible that some people do not qualify for a consolidated loan if they have a poor credit history. Likewise, taking out another loan to pay off debt is not always advisable as it can encourage more borrowing. However, there are other options available.
A Debt Management Plan is one alternative that is suitable for some people. This is an agreement between lenders and borrowers regarding how debts are repaid. A third party usually arranges this, and it may involve a handling or set-up fee. There are some third-party agencies that do this for free. This is an option that can help people with short-term difficulties meeting their repayments.
Insolvency procedures, such as Individual Voluntary Arrangements and Debt Relief Orders, are an alternative that is sometimes suitable for people with more serious debt issues. These are formal procedures that can stop creditors from taking legal action for a set period.
An important point to note is that consolidated loans leave a footprint on your credit report called a credit search. Taking out different loans in a short period is an indicator to lenders that you rely on credit, and this can negatively impact on the likelihood of you getting credit in the future.