A debt consolidation loan allows you to put all your debts together and make a single payment each month. What's more, it means that you can spread your payments over a longer timeframe and potentially secure a lower rate of interest if you have bad credit.
The Importance of a Good Credit Rating
A person's credit rating is a key factor in determining whether you can attain a consolidation loan. Those with an unblemished record will be able to secure the most competitive deals. Most importantly, they will have a greater choice which includes both secured and unsecured loans.
What If Your Credit Rating Isn't as Good?
Even if a lender does agree to loan you the money, those with adverse credit will have to pay a higher rate of APR. You will normally need to be a home owner and your loan will be secured on your property. You will also need to have sufficient equity in your property.
There are some unsecured loans available, but most will attract a rate of interest in the region of 25%. If you are paying more attractive rates on your other credit agreements it is highly questionable whether you should consolidate.
What Type of Loan?
If you have the choice an unsecured loan should almost always be chosen for two critical reasons.
- If you do encounter financial difficulties you can enter a Debt Management Plan or an Individual Voluntary Arrangement, particularly if you have gambling debts. It gives you a greater range of options should you end up in a position where you lose your job or your personal circumstances change.
- As you aren't utilising the equity in your home, it will be easier to attain secured finance should you ever desperately need to. This gives you another chance should the unexpected happen.
Turning unsecured into secured debt is a serious business, but there are genuine reasons why it should still be considered.
- A secured loan will normally allow you to get a better rate of interest. The reason for this is that the creditor is afforded greater protection.
- Those with bad credit are unlikely to be able to get any other kind of loan. There may be no other choice.
- You will be able to repay the loan over a longer period of time which means that your monthly payment will be lower and more affordable. It is, however, important to be aware that the longer the loan the more interest you will pay over the duration.
Consolidation loans provide people with simpler, more manageable finances. You can't put a price on having a payment structure to your debt and knowing that in a certain number of years that debt will be completely paid off.
Seek Financial Advice
Before proceeding with any type of debt consolidation it is advisable to consult an independent debt advisor to make sure that the loan is right for your personal circumstances. There are a number of free sources of debt advisory assistance, including Pay Plan and the Citizens Advice Bureau (CAB).
