Debt consolidation combines all your loan debts into one new loan. A consolidation loan helps you clear your debts in one go and start afresh. It can be an effective way to address your adverse credit. Here's some consolidation debt advice:
How do I go about consolidating multiple debts?
What is a debt consolidation loan?
It's a loan which combines all your loans from all sources (mortgages, credit cards, etc.). Instead of managing and paying off multiple installments every month, you now have to pay only one. This loan can be secured on your assets, or unsecured.
You need a debt consolidation loan when:
- You find it difficult to handle and repay your existing debts.
- Your income is not enough to meet your expenses and loan repayments.
- You pay a high interest rate and the best debt consolidation loan is available at a lower rate. What are its pros and cons? Pros: It helps you easily manage your debt (as you have to now manage only one debt) and reduces the monthly repayment amount. Creditors will stop knocking on your doors. Cons: If you offer your assets as security, they can be sold if you are unable to repay the new loan. Lower installments mean a higher tenure - you may just be extending your debt period. You have to incur costs associated with taking a new loan. The new loan period cannot be changed without paying a penalty. Who regulates debt consolidation? If you are offering your home as security for the new loan, the lender must be registered with the Financial Services Authority (FSA). If your home is a second charge, the lender must have a Consumer Credit License from the Office of Fair Trading (OFT). If the new loan is unsecured, it will be capped at £25,000 (June2011). Will my credit rating be impacted? No, unless you have missed any repayments.
How should I go about getting a debt consolidation loan?
Shop around. Talk to loan brokers. Use online calculators to figure your repaying capacity. Interest rates vary, so research carefully before committing to a loan. What questions should I ask before taking a loan? - Is the interest rate fixed or variable? - How long will it take to repay and how much will be repaid back? - What happens when you miss a monthly payment? - Are any costs involved if you repay early? - If the loan is secured on your home, what will happen if you cannot repay it? What are the costs, how much I can borrow, for how long, and how much will be the interest rate? Answers depend on: - Property value (security) -Repaying capacity - Personal circumstances What is IVA in the UK? That's an Individual Voluntary Agreement (IVA) for people who want to avoid bankruptcy.