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Should You Consolidate Your Debts?

If you're trying to sort out a debt problem then you need to know exactly what those debts are. If you owe money for a car loan, an overdraft, a couple of credit cards and a store card, that's five separate debts. No wonder it's been hard work keeping track of your spending.

Author: James D. Ayrey

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If you-re trying to sort out a debt problem then you need to know exactly what those debts are. If you owe money for a car loan, an overdraft, a couple of credit cards and a store card, that-s five separate debts. No wonder it-s been hard work keeping track of your spending.

One option is to consolidate all the debts by borrowing a lump sum to pay off all the individual debts, so that you-ve only got one payment to make each month. It may seem a bit unfoolish to suggest trying to get a personal loan when you-re already in it up to your eyeballs but as long as you realise that what you-re actually doing is getting a replacement debt, then it can make sense. Apart from making it easier to keep an eye on your spending, you can often save money by getting a consolidation loan at a much lower rate of interest than your current debts are costing you.

Be warned that such loans are only a good thing if you actually use them to see off your creditors - without incurring any further debts! Getting a consolidation loan only means you have amalgamated your debts, you haven-t actually cleared them.

It-s estimated that about 80% of people who take out a consolidation loan go on to run up further debts so make sure you-re in the remaining 20% who don-t. Your credit card statements will tell you that you no longer owe anything and it-ll be very tempting to dip into your available limit. Don-t! Be determined, be frugal, be sensible. And don-t be one of those people who incurs further debt by not heeding this very important rule. A consolidation loan may well help you manage your money better but until it-s paid off, you won-t be out of the woods.

There are a number of things to look out for when looking for a consolidation loan. The interest rate is obviously the most important - it should be the lowest you can find. But don-t borrow more than you need. Many lenders will offer lower rates if you borrow more but don-t fall into the trap. You might think it would be good to have a nice holiday after getting all those different creditors off your back but remember you will still have to pay it back - and with interest too.

If possible it should also be flexible so that you can pay off more than the required amount if you suddenly find you can afford to increase the repayments. Many loans incur penalties if you pay them off early - and quite a lot of people do - so a flexible loan is best.

Such loans can also be secured or unsecured. Think long and hard about taking out the former as the loan will be secured against your house so, if you default, you could lose your home. Admittedly a secured loan will probably have a lower interest rate but if you think there-s the slightest chance that you-ll default, then it-s best avoided.

Your lender will probably try to persuade you take out payment protection insurance. Again, think hard about whether you really want it as it will add a considerable amount to your loan. The insurance is to protect them should you find yourself made redundant or ill and unable to work and it often doesn-t kick in for a couple of months anyway. It-s up to you to decide whether that misfortune is possible or likely but usually these policies are pretty expensive and a waste of money. You may prefer to pay for what insurers like to describe as -peace of mind- but just remember that it-s their peace of mind you-re paying for!

Also, try to spread the loan repayments over as short a period as possible. The longer it takes to pay off, the more you-ll pay in interest and the less motivated you will be to stay out of further debt. The important thing is to make sure that you can comfortably make the payments.

And finally, shop around. Don-t be tempted by many of those dreadful adverts for loans that get shown on afternoon telly - unless you want a high interest, inflexible loan that is secured against your home. A consolidation loan is a long-term commitment so make sure you choose it as carefully as you might choose a spouse!

About Author

James D. Ayrey is a UK finance broker with over 5 years experience behind him. To read some more of his wisdom visit his articles site at Assured Finance Articles - http://www.assured-finance.co.uk/articles.htm

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