As the credit crunch continues to bite, debt consolidation loan advertisements are appearing with increasing frequency. This article explains how debt consolidation works, and the pros and cons of this form of borrowing.
For anyone struggling with debt, consolidation appears to be an attractive proposition. Debt consolidation replaces existing loans & debts with a single loan, leaving just only one payment to make every month.
Unsecured debt consolidation loans with poor credit attracts high interest rates. For most people today, the majority of the repayments made on existing loans barely cover the interest. Meanwhile, very little is going toward reducing the debt. When finances get tight, it is natural to try to minimise outgoings as much as possible. Often, one of the first things people do is to cut the repayments on credit card and store card debt to the minimum.
Unfortunately, the majority of the payment will be put toward the interest, with very little actually going to reduce the debt. Credit card companies love people who only pay the minimum each month, as they will stay in debt longer and the company will make more money.
Debt consolidation helps to break the cycle of spiralling interest charges, by replacing all existing unsecured borrowings with a new loan, often at much lower rates. The loan repayments will be spread over a longer time period, but in many cases the total repayable will be lower than if the existing loans were left to run.
The downside to debt consolidation is that it extends the period a person remains in debt. Neither is it guaranteed to be a more economical solution in some cases. Debt consolidation loans work best for people with a reasonably high level of unsecured debt, including credit or store card debt, which is not likely to be cleared in the near future.
Debt consolidation is nothing but a major financial decision, and as such it is always wise to seek advice from a qualified debt counsellor or financial advisor. Whilst this article covers the basic advantages and disadvantages of debt consolidation, it is no substitute for proper professional advice.