Looking at the world that we live in, it can be extremely difficult to go through life without using at least some of the services offered by banks and other lenders. While taking out a single loan may not put too much stress on your monthly budget, having to pay for multiple types of debt will quickly eat up your earnings. This is mainly due to the fact that each loan or form of debt that you hate to repay will have a different interest rate attached to it. In other words, if you have 2-3 loans that you have to repay on a monthly basis and a nearly-maxed credit card, the total cost of the debt may amount to the equivalent of one of the monthly payments that you have to make.
This having been said, there is a way to reduce the cost of your total debt and to also extend its term. Most lenders offer debt consolidation loans, which are tailored specifically for individuals who have too much debt to keep track of, or to repay consistently.
What is debt consolidation and how does it work?
A debt consolidation loan is a type of loan designed to have a value that is greater than any singular loan. Its purpose is to help you repay at least some of your debt in full, consolidating it in a single larger loan. For example, if you have two personal loans, a credit card with a debt of £2,000 and a line of credit that is nearing its term, you can take out a large debt consolidation loan and use the money to repay all of them. The money from the debt consolidation deal should be enough to repay the loans ahead of time and leave you with a single monthly payment that you have to worry about.
Debt consolidation loans usually have a term of at least one decade and have a fixed interest rate. It is also important to keep in mind that they are secured, and you will have to offer collateral in the form of either your car, home, or another property.
What are the risks of a debt consolidation loan?
The main risk of a debt consolidation loan is the fact that you may lose your property. All lenders that offer debt consolidation loans will require that you put up your property as collateral. Note that this is not automatically a dangerous deal as the lender will only be able to take possession of your property if you are unable to make the monthly payments for a set amount of time.
Keep in mind that the terms and conditions for these loans vary from one lender to another, and you will have to pay special attention to the clauses that specify how many skipped payments will lead to losing control of your property.
Should you take a debt consolidation loan out?
If you have a large number of loans and are either unable to keep track of all of them, consolidating your debt will be a good idea. However, you must take into account that one of these loans spans over 10+ years. Although debt consolidation loans usually have a fixed rate, the fact that they have very long terms means that you need a great deal of financial stability in order to successfully repay them.
If you lose your job or are unable to make the payments, for any reason, you may lose the property that you’ve used as collateral. Only take out a debt consolidation loan if the cost of your loans is too great to pay efficiently and if you are absolutely sure of the fact that you will be able to make the monthly payments.