If the thought of debt consolidation leaves you somewhat confused, scratching your head in search of meaningful answers, then you are not alone. It’s a sad fact that the vast majority of us are simply unable to get from one week to the next without some type of borrowing or credit line, whether it’s a mortgage, a string of credit cards, unpaid items from the catalogue, or even a dreaded payday loan.
Of course, when you break it down to the simplest level, there are two types of debt that most of us get into. These are the debts we can realistically afford to repay, and the debts that have seemingly spiralled way beyond control that we simply don’t stand a chance of paying back on time.
What is a debt consolidation loan?
Debt consolidation loans are a relatively new type of borrowing product aimed at reducing your monthly outgoings by lowering the interest rate on existing credit and extending the repayment period as an additional means of helping you budget. With debt consolidation, the idea is to simplify life without causing any unnecessary confusion.
As a useful example, let’s consider an employee at a bank who has taken out a personal loan, makes regular, and sometimes unauthorised, use of his overdraft facility, and also has a couple of credit cards that he likes to use to keep himself afloat until the next pay check arrives. With these three credit lines alone, our friend at the bank has a total of four finance products to juggle each month, and the interest rate and charges are an additional burden that he has to deal with.
With a debt consolidation loan, it would be easily possible to pay off the overdraft, settle the credit card debts, and simultaneously make a substantial repayment on the personal loan, which would help save money while also providing an additional safety net with any funds that are left over. Whereas the previous debts were costing £250 a month with an average interest rate of ten percent, the debt consolidation loan costs just £75 per month to keep on top of, and the interest rate has been reduced to around 4.5%.
Although the consolidation loan might take a while longer to pay off, our friend is already enjoying some substantial savings on his debt, both now and in the foreseeable future.
Secured vs. unsecured debt consolidation products
If you have the required assets, a secured consolidation will probably be the best way forward. Secured borrowing products are always the more affordable option, as the lender has the added assurance that, should the borrower default, the debt will be paid back in full through the sale of any agreed assets used as security. This results in larger loan amounts being made available with less stringent borrowing criteria and longer repayment terms.
Unsecured consolidation loans are typically only available to applicants with a good credit rating. However, if you are struggling with your debts at present, the chances are that you will have missed one or two repayments in the past, so this type of borrowing product might not be available to you.
As well as consumer debt consolidation loans, there are also several commercial loans available for the consolidation of business debts. If you run your own company and are looking to reduce or lower your debts while freeing up finances for other areas of your enterprise, then a commercial debt consolidation loan could well be in your best interests.