You will find several things going for combining your financial obligations into just one consolidation loan. Perhaps even the concept ‘consolidation’ is comforting for most people. It invokes the concept of reducing many small plus some not so small issues and amalgamating all of them into a single controlled issue. As an alternative to having a numerous lenders to cope with, the borrower will have only one creditor to control and merely just one particular monthly payment to make rather than being forced to make many repayments to a variety of creditors for differing amounts. Because of this the borrower expects that coping with money affairs gets to be simplified. One other main hope is that the debtor’s credit standing is going to get better substantially as soon as all personal debts in particular credit card obligations are lumped into the loan consolidation. Each and every one of the previous credit card accounts gets paid permanently. To crown it all, the regular monthly repayment on the debt consolidation loan will with luck , be significantly less than the full amount of the monthly payments on all of the old debts – credit cards, overdrafts and personal loans.
Well, that is the idea at any rate. One thing to be aware of is the key reasons why monthly payments decrease at all. It is not actually the benevolence or kindness of the new consolidation loan provider which is the trigger for this drop. There are usually several factors at play. One issue is usually that the term of the loan consolidation might be (significantly) lengthier than the durations of the initial loans. For example, had the borrower carried on maintaining each of the old loans (instead of lumping them all into a consolidation loan), then he or she might well have paid a few of them off rather quickly and others over a lengthier period of time. A further matter is that the lender of the debt consolidation loan may seek to secure the money advanced on the debtor’s property, often the family home. Should this be the reality, the loan company has considerably reduced the lending risk that the borrower will default on payments because the lender may eventually fall back on the value in the property to cover the monetary debt if necessary. Reduced monthly repayments are commonly based on one or both of those factors. Even though the interest rate on the proposed loan consolidation may be smaller compared to the interest rate the borrower is now having to pay on some accounts at present, the full amount of money repayable throughout the full term of the loan consolidation could well be substantially higher as opposed to the amount of money currently payable under the old loans.
Let’s look at exactly what can go wrong if you take out a loan consolidation. When you are having difficulties to make your repayments at present you must make sure that you can without difficulty make the consolidation loan repayments in a sustainable manner and for the total duration of the expected term. Make sure you discontinue making use of the credit lines that you have been making use of. For instance, you’ll want to cut up your credit cards since the lenders may, now that you have cleared the debts, induce you to keep using the same credit cards that got you into difficulty in the beginning. Furthermore you will need to discontinue making use of any overdraft account facilities which unfortunately contributed to your financial difficulties in the first place. Since most of your disposable income will need to go to pay back the debt consolidation loan you will want to restrict your access to other credit even though your ‘old’ loan companies may choose to do further business with you and make all kinds of ‘attractive’ funding offers to you. It is best to reject such promotions, if you want to avoid struggling financially again.
One more pitfall is that when you have agreed to secure the debt consolidation loan on your residence and find that you are struggling to maintain the repayments, you may perhaps suffer a loss of your dwelling. Although you may obtain a low interest rate on the loan consolidation by agreeing to secure it on your residence, the likely longer term of the debt consolidation loan means that you give up some flexibility with regards to your mortgage e.g. you will not be mortgage-free as soon as you expected to be and you may not be able to retire as early as you had expected to do.
Therefore, do think long and hard before you decide to plump for consolidating debts. Consider other choices that may be right for your personal circumstances. For example you need to determine whether you may be insolvent. If you are actually insolvent, two of the choices you need to give some thought to are possibly to go into an Individual Voluntary Arrangement (IVA) or to petition for your own Bankruptcy (BCY). These are two personal insolvency procedures that shield you from your lenders and that also are reinforced by the full weight of the law behind them. Even if you are not insolvent, you should consider entering into a Debt Management Plan (DMP) with your lenders. You can do this yourself by arriving at agreement with all of your creditors separately regarding how you will pay back your debts to them. This is sometimes referred to as a self administered DMP. Most DMPs however are administered with the aid of providers which specialise in establishing DMPs between consumers and their creditors and which then administer these plans during a period of years. Whatever you prefer, do take guidance. Stay away from consolidation until you know about and have taken into consideration all other options.