Consolidation Loans

The total personal debt in the United Kingdom at the end of September
stood at more than £1,000 billion – an increase of just over 5% in a 12-month –
so if you are feeling the effects of the credit crunch, and juggling
monthly repayments on credit cards, loans, etc., you are certainly not
alone. One possible solution to this ongoing problem may be to simplify your
finances by taking out a consolidation, or "debt consolidation", loan. As
the name suggests, this type of loan is designed to pay off existing
borrowing, and replace multiple monthly repayments with a single, affordable
repayment. This may not only provide what is effectively a "fresh start",
financially, but may also reduce the amount of interest payable on your
debt. Similarly, fixed monthly repayments – as opposed to minimum
payments on credit cards, for example – can allow you to pay off a
reasonable proportion of the debt each month, and thereby reduce the length
of time required to repay the total amount.



Pros & Cons of Consolidation Loans



The effectiveness of a consolidation loan depends, obviously, on the
interest rate available; there is no advantage to be gained by replacing
multiple repayments with a single repayment if this means paying the
same, or more, interest on your debt, but if you have one, or more,
credit cards – whose typical APR ("Annual Percentage Rate") is 17.5%, or
more – for example, a consolidation loan may provide a significant
benefit in this respect. You should, of course, choose the lowest APR available;
APR represents the true cost of borrowing (including any fees, charges, etc.,
which may not be immediately apparent) in a year.



Do bear in mind, however, that many lenders may you offer a more
competitive interest rate if you borrow more money – possibly more
than you actually need to repay your existing debt – so you need to
exercise a degree of self-discipline. The prospect of further spending a
holiday, or some other "luxury" item, may be appealing, but remember that the
purpose of a consolidation loan is to improve your financial situation in
the long-term, not to make it worse.



You should also calculate a repayment term that is suited to your own
financial circumstances; too short a repayment term may place you in the
position of being unable to meet monthly repayments, whilst too long a term may
cause you to lose your initial enthusiasm for improving your financial
situation, because you cannot see any real reduction in the total amount of
your debt. Lenders may actually ask you to complete a statement of your
outgoings – mortgage, or rent, payments, utility bills, other credit
commitments, etc. – so that you, and they, can make a realistic
assessment of an affordable monthly repayment.



On receipt of a consolidation loan, it may feel, psychologically, that
your financial situation has improved – which, indeed, it may well have, in
the long-term – even though you may not have actually reduced the total
amount of your debt, at all. This can be a potentially hazardous situation,
because it presents the illusion of available funds – possibly large amounts –
from previous sources of credit. It is a unfortunate fact that up to 80%
of borrowers who take out a consolidation loan actually run up further debts, so
be careful with credit cards, in particular, once the balance has been paid off.
A credit card with a high credit limit and a zero balance can be almost
irresistible, so it may be necessary to close any accounts and/or cut up cards,
themselves, unless your level of self-control is above average. The solution to
any debt problem is either to spend less, or earn more, in the long-term; in the
absence of a forthcoming lucrative career move, or promotion, this typically
requires a definite change in attitude towards spending.



The issue of PPI, or "Payment Protection Insurance", has always been a
thorny one in relation to consolidation loans, or loans of any kind. PPI
is designed, in theory, at least, to protect a borrower from unforeseen
circumstances, such as accident, illness, or redundancy, which may prevent him,
or her, from making repayments on a loan, or other credit agreement. In
practice, however, the number of borrowers who actually claim on this form of
insurance policy is small compared to the number of policies sold, and if
bought alongside a loan, PPI is typically very expensive. It is obviously up
to individual borrowers to decide whether PPI is necessary, or not, but even
if it is, it may be available from an alternative provider at a fraction of
the cost.