Debt Consolidation Loans

Debt consolidation loans are not really any different to unsecured or secured personal loans (a debt consolidation loan may be either), except for the fact that they are promoted specifically for the purpose of consolidating all of your debt payments into one single monthly sum of money.

Essentially, the debt consolidation company will buy up all of your existing credit agreements, loans, credit cards and other debts and bundle them into one. The rate of interest is likely to be lower than that payable on your store cards and some of your credit agreements, but the real reason that the repayments appear so much lower is that the agreement is to pay them off over a longer timeframe.

A longer term means that you may well be paying just as much or even more in terms of long-term interest, so it may not necessarily be to your best advantage. However, many people find that the sometimes-drastic reduction in terms of monthly outgoings is well worth it, though you should shop around to get the best deal in terms of interest rate, term, flexibility and charges.

Consolidating your debts helps to focus your attention on reducing a single debt as opposed to several smaller ones. Typically the interest charged on the one loan should be lower than the average of all your other debts beforehand. However, this is only the case if you are disciplined and stick to the consolidation plan. Unfortunately, debt consolidation loans have the greatest appeal to those with a less than perfect credit record, which makes them more vulnerable to the temptation of taking out further credit elsewhere once their existing debts have been bundled into one package.

In short, a high proportion of people who take out loans to consolidate their debts go on to amass further debts before they've cleared the first lot. It may be tempting to go on a bit of a spree when your credit card is cleared again, but that is the worst thing that you can do and you should only take out this type of loan if you can be sure that you will stay on the straight and narrow.

03 July 2008