Debt Consolidation - is it right for you?
At some stage, every person has wished that there were easier ways to pay off their debts. It can sometimes be a case of not how much you have to pay to service those debts, but the fact that you end up paying a vast amount of different organisations/creditors (e.g. banks and credit card firms) every month.
Debt consolidation is a strategy sometimes used by consumers to better manage their debt problems. Rather than paying off several separate bills each month, a consumer gets one loan and thus consolidates his or her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time. The question we have to ask is; ‘Is it easier to consolidate all these debts to make your debts more managable’?
The desire to consolidate debts is a massive phenomenon and every year thousands of people take the debt consolidation route. Investigations earlier this year by the Office of Fair Trading (OFT), the consumer debt watchdog, found that in 2002 more than £40 billion of secured and unsecured lending was used for debt consolidation.
This compares with an estimated £21 billion in 1999. In addition, researchers Mori Financial Services found that about 15% of last year’s £16 billion credit card balance transfers – where you get a 0% credit card deal – involved consolidation of more than one credit card balance into a single card.
Unbeknown to many people, there at least two main types of debt consolidation methods:
- There is the unsecured loan where one would go to their bank or lender and borrow a bulk sum of money to pay off all the other loans. Here a security is not required to avail the debt consolidation service. The disadvantage here is that because the loan is considered as high risk for the lender, the interest on that loan is likely to be high.
- Then there is the secured debt consolidation loan. This is a type of debt consolidation where the borrower provides a security to the lender. The security could be anything from a car to any other asset. However, if the home of the borrower is the security then it is known as home equity. It is another type of secured debt consolidation.
You must always ask yourself if you will demonstrate the fiscal discipline necessary to benefit from debt consolidation. If you obtain a consolidation loan with a lower monthly payment, but immediately run up new credit card debts, you will almost certainly end up in a worse position than you were in prior to consolidating your debts. You can even end up in a cycle of obtaining “consolidation” loans, with the commissions, fees, and interest rates accumulating to put you deeper and deeper into debt. Essentially, this is the main disadvantage of getting another loan to pay off debts.
Other options are available such as debt management which enables you to consolidate your debts into one affordable monthly payment but without borrowing anymore money. Furthermore, when one undertakes debt management, interest on the borrowings can be frozen.
As we come to an age where up to one million people are on the verge of declaring themselves bankrupt, it is undeniable that financial processes such as debt consolidation seem like a sensible option. It is also very well publicised that a quick chat with a debt adviser will help you to find the best option.
Leave a Reply