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By Russell Cavanagh
Staff Writer
Tuesday, 26 August 2008 |
Debt Consolidation Loans
What you should know about debt consolidation loans:
- Good for avoiding bankruptcy threats
- Can help rebuild a good credit history
- Can make monthly repayments more affordable
- Can lose you your home if you don’t keep up repayments
- Increases the length of the overall debt repayment period
- Adds interest on top of interest and increases the total owed
- Harder to renegotiate if things go wrong again
 Compare debt consolidation loans
Alternatives:
Compare 0% balance transfer credit cards
Compare 'life of balance' low rate credit cards
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Best 0% balance transfer credit cards
Amy Purser takes a look at the growing crop of balance transfer credit cards and assesses which balance transfer credit card offers the best deal.
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RISING inflation is constantly in the headlines right now and the Bank of England just announced that essential household spending looks set to increase well into next year.
Rolling up outstanding arrears on household bills and unmanageable loan or credit card repayments must therefore be ever more tempting to many of us.
But be careful, debt consolidation loans won’t suit everyone and they can even prove rather dangerous!
What is a debt consolidation loan?
A debt consolidation loan is a way of rearranging multiple existing debts down to a single loan offering a lower monthly payment and -usually - a longer repayment schedule.
Many lenders provide debt consolidation loans to borrowers with equity in their homes and whose household budget shows there is a surplus available each month to service the new loan repayments.
Points to consider
It’s vital to know that failing to make repayments on a secured loan can lead to loss of home through possession proceedings in the county court.
It’s also important to realise that a debt consolidation loan will have to cover existing contractual interest and any early-settlement penalties on loans you want to wrap up in the new agreement.
And don't forget that the consolidation loan is not interest free - it will bring its own interest to inflate the new, consolidated balance.
Pros and cons of debt consolidation loans
Here are the good and bad points. Consider them carefully before making any decision.
Pros:
- A good way of safeguarding valuable assets (like your home) when dealing with creditors threatening bankruptcy
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Can re-establish a good credit history if repayments are made promptly and in full each month
Cons:
- You can lose your home if you don’t meet contractual repayments and the lender takes court action and sell it to pay off your loan
- You will pay further interest on the new loan to cover interest and charges already added to those loans you want to consolidate and so owe more in total
- It will take longer to repay your debt as payments will be spread out over an increased period
- It may be more difficult to re-negotiate lower repayments if you experience further financial difficulties
What are the alternatives to debt consolidation loans?
Debt consolidation loans are only for the direst of circumstances as you risk losing your home if you can’t make the payments fully and on time.
It’s probably better to see if you can shift your debts onto a “balance transfer” credit card that has a 0% APR so that the debt remains unsecured, your property stays safe and you have time to repay a balance that should not increase any further.
The Virgin credit card offers 0% APR for 15 months and there are other good deals available too. You can compare 0% balance transfer credit cards here.
Alternatively, a low rate balance transfer credit card (sometimes called a 'life of balance' credit card) may be more suitable. These credit cards allow you to transfer multiple debts to the card and then pay them off with a suitably low interest rate for the life of the balance.
In other words there is no deadline at which the interest rate suddenly goes up, as with 0% balance transfer credit cards. What's more, there is usually no transfer fee.
The Capital One Low Rate Balance Transfer credit card is offering a 5.5% interest rate for the life of the balance. You can compare 'life of balance' credit cards here.
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