Debt consolidation loans are a popular for those wanting to get out of debt. They offer the ability to group your smaller debts together and only have one monthly payment to manage, which is often easier. However, before you start jumping onto this option, there are some things that you should know. This isn’t always the best option available.
- 1. The Amount You Need to Borrow: How much is the total of your debt? If it is more than £10,000, you will struggle to find a lender offering that for debt consolidation. You may need to look into other options available, such as debt management. If you only need to borrow a small amount, lenders may not want to offer long term loans, especially if it is less than £1000.
- 2. Can You Clear the Debts Yourself? Do you really need to use debt consolidation? There are other ways to clear your debts off, and one of those is to do it yourself. Debt consolidation is seen as an easier way to manage your smaller payments but you could look at each debt in turn and work on a plan of attack. Think about the amount you are willing to spend on your debt consolidation each month and spend that on one debt at a time, while clearing the minimum payments on others. You will soon find that you are living debt free.
- 3. The Affect on Your Credit Rating: Debt consolidation loans do have an effect on your credit rating. By taking out another loan, you are showing other lenders that you have struggled with your finances in the past. They will worry that you will allow this to happen again in the future. However, you will clear your other debts and keep paying a monthly repayment that shows you can handle a long term debt, which could actually help you get a mortgage in the future! This is also much better than debt management companies, which stay on your report for a longer period of time.
- 4. Great for Those without Organisational Skills: If you do struggle with organising and managing your money, having debt consolidation may be the best option. You will have one monthly repayment to manage and you know how long those payments will last. There is no need to work out which company needs paying off the soonest or whether you have made the minimum repayment for other creditors that month. You will also spend less in the long run on interest.
- 5. Stuck on One Set Monthly Repayment: The benefit of handling the payments yourself if that you can keep changing the amount depending on your monthly needs. If an emergency comes up, you will be able to clear the minimum payments one month and spend the extra money on the emergency. You can’t do that with consolidation loans. You are tied into a set number of payments for a set amount of time. If you miss one, you will damage your credit rating and face further financial problems.
- 6. May Not Be the Most Cost Effective: Debt management may work out to be a more cost effective option, especially if you owe a lot. You only pay the amount you can afford each month, for a set period of time, so you may find that part of your debt is wiped clean. However, the damage to your credit report may not be worth that.
Getting out of debt is possible with debt consolidation loans. They group your smaller debts into one, making it easier to manage your payments. However, that doesn’t mean it is the best option for your particular needs.
This guest post was written by Brainard Cheney, a financial advisor. After working for years in the financial industry, he recommends www.missoldppiclaimsco.co.uk for those who have been mis sold PPI.