Debt Consolidation – What You Should Know

So what is debt consolidation? Quite simply, debt consolidation allows people who currently have a number of credit agreements to ‘consolidate’ them into one single loan. This single loan is generally repayable over an extended period. If you are a homeowner and have sufficient equity in your home you may want to consider applying for a secured loan, or homeowner loan, to consolidate your debts by borrowing against the equity in your home.

With interest rates rising considerably many people with multiple loans and debts, taken out with several different lenders, are finding it increasingly difficult to pay off the monthly installments. Debt consolidation companies are now cleverly saturating the market in prime time TV advertising slots in an attempt to reel in as many customers as possible. These debt consolidation loans seem as the perfect solution to all your money problems. However, they may not be quite as straightforward as they first appear.

Statistics show that the majority of loans taken out in 2007 are for debt consolidation. This has overtaken the usual loan types of home improvement or personal loans. Debt consolidation loans are clearly becoming part of a growing trend offering a much lower interest rate than that on balances from credit card companies. Although a lower interest rate may seem tempting enough in the beginning, it is worth remembering that debt consolidation rates are taken out over a longer period of time thus increasing the overall amount of interest you actually pay back.

A large portion of debt consolidation loans are, in fact, sold to homeowners. The danger of having a loan secured on your home is that should you be unable to make the repayments, your property becomes a high risk for repossession. Unsecured credit agreements such as credit card companies can therefore get away with charging higher rates due to the fact they have no financial security back up from their customers.

As with any loan you may take out, there are potentially both good and bad points. Although debt consolidation loans may be beneficial to some by offering a lower monthly repayment, any defaults and you could lose your home altogether. And despite the fact that a secured loan may help you get back on top of your finances, you must be careful that once you have paid off any outstanding balances on credit cards and other debts, that you are not tempted to start spending again. This will only put you back to square one and defeat the purpose of taking out a debt consolidation loan in the first place.

It is also worth knowing that the rates on most secured loans are variable, therefore they are prone to increase should interest rates increase.

Should you decide that taking out a loan is your only real option, then do take time to shop around. In addition to banks and building societies you also have the option of a growing loan market online. Many of these finance companies purely operate online in an attempt to keep costs down, benefiting both them as well as their customers.

Please note, that for anyone experiencing severe debt problems it is strongly advisable to seek any initial help from a debt free counseling body or charity service. The Citizens Advice Bureau and National Debtline are just two of the organisations that can offer free advice and support.

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Published on September 23, 2007