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Debt consolidation

Loan Consolidation:
A Guide to Debt Consolidation Loans

Many borrowers who are up to their knees in debt wish that they could somehow make their debt payments more affordable. One of the ways of doing this is through loan consolidation or debt consolidation. Refinancing your debts to a cheaper deal is one of the most effective ways of freeing money up and making loans more manageable.

How does loan consolidation work?

Loan consolidation or debt consolidation is the process in which your loans and debts are restructured ideally into one affordable amount which you agree to pay over a certain period of time.

The objective of loan consolidation is to combine all your loans and outstanding debts into a single loan and find a better deal where interest rates are less than the ones you are currently paying.

More and more debtors are finding debt consolidation a useful way to cope with their growing mountain of unpaid debts. Similarly, an increasing number of credit card holders are consolidating their credit card debts into a single card where they can enjoy 0% deals.

What loan consolidation options are available?

A variety of financial products can be used to consolidate your loans including:

  • Secured Loans: These are also known as homeowner loans. Secured loans enable you to move expensive unsecured debt onto a secured loan with a cheaper interest rate. You can borrow more money from a lender by putting your home up as collateral.

  • Unsecured loans: These allow you go to a bank or lender and borrow a sum of money to pay off all other loans. As the loan is unsecured, you do not risk losing your home in the event of a default.

  • Re-mortgaging a property: You go to a new lender and borrow more money, based on the rising equity in your house. This enables you to move expensive unsecured debt onto your mortgage.

What are the benefits of loan consolidation?

  • Lower interest rates

  • Lower monthly payments

  • Dealing with just one creditor

What are the disadvantages of loan consolidation?  

  • Additional cost of settling an existing loan (for example: redemption penalties)

  • Additional cost of arranging a new consolidated loan (for example: broker commission)

  • Longer repayment period

  • Risking your home if taking out a secured consolidated loan

The bottom line on loan consolidation  

Many borrowers, particularly those in deep financial trouble, are unaware of other possible solutions open to them besides loan consolidation or debt consolidation. You can try other tactics such as:

  • Negotiating with creditors yourself

  • Getting professional help from free debt counselling services  

Consolidating your existing loans and debts into a single smaller monthly repayment can often be all that is necessary to put an end to the stressful demands made by harassing creditors. However, loan consolidation and debt consolidation should not be considered a magic potion. If applied sensibly, it can help you clear your debts. But if you have more serious financial problems, loan consolidation will not be able to help you in the long run.

Loan consolidation is a good solution if:

  • You are paying high interest charges and want a cheaper rate

  • You need to reduce your monthly payments

  • You need to release additional money to meet unexpected commitments

 Loan consolidation is not a good solution if:

  • You have already consolidated your debts previously

  • This consolidation loan includes previous outstanding debt

  • You want to move debts from credit and store cards only to allow you to start using those same cards again  

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