| Debt Consolidation
Debt consolidation is the process where a debtor takes out a single
loan to pay off other existing loans. This can be done to secure
a lower interest rate, and hence make lower monthly repayments,
or to just to simplify your repayment plans. Unlike debt management,
where your previous debts are not cleared, a debt consolidation
loan clears old previous debts, once and for all.
Debt consolidation takes a number of forms; either as the conversion of multiple unsecured loans into a new, unsecured loan, or debts can be consolidated into a secured loan against an asset, most often a property, which be used as collateral. Because a secured loan offers less risk to the creditor, the interest rate can be lower, and hence a consolidated loan can be cheaper. The risk to you the debtor is that you could lose your home if you fail to keep up repayments.
Debt consolidation offers advantages to people with high levels
of credit card debt because at the present time credit card interest
rates are generally higher than those offered by the banks. Other
groups that would benefit from debt consolidation are individuals
with high levels of debt against high street store cards with an
average APR of about 30%. It is claimed that many shoppers are paying
inflated interest rates on their chargecards and being overcharged
by 100 million plus each year.
Clearly, for many people there can be benefits to simplifying your credit commitments and consolidating them into one existing loan, thus potentially:
- Reducing financial commitments
- Reducing the risk of paying fees due to late payments to one or more of your creditors
- Alleviating the stress in having to deal with multiple creditors each month
How Debt Consolidation Works:
Debt consolidation allows you to make a clean start, converting
your existing commitments into a single loan payment. Any independant
advisor will review your financial circumstances to make sure that
a consolidation loan is the best option for you. You should note
that a consolidation loan would usually be secured against your
home, which would be at risk. Hence, debt consolidation may not
be available if your financial difficulties are so severe that your
credit rating is adversely affected, and if your debt commitments
are very high.
If a debt consolidation plan is the best option for you, your old loans will be paid off and replaced with a new one on more favourable terms, and your previous credit rating should be kept intact. You will then have a new loan with a single monthly payment.
If you still have any questions about a debt consolidation plan then you should arrange a meeting with your local Bank Manager or an Independant Financial Advisor who can lead you through the best options for your personal circumstances.
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