Debt Consolidation Loan: What is debt consolidation? Consolidating Debts if you live in the UK

Debt consolidation means taking out one loan in order to pay off other debts. These may be in the form of credit cards, personal loans, store cards, hire purchase loans or payday loans. Many people consolidate debts so that they can get a cheaper and lower interest rate. Some people do it in order to secure or get a fixed rate, while others may choose to use a consolidation loan so that they can consolidate all their debts into just one single loan with one monthly payment.

Consolidating Debts with Secured or Unsecured Loans

Very often you can consolidate debts by just taking out an unsecured loan which you then use to pay off a number of other small loans and credit cards. But in many cases, consolidating debts involves a homeowner taking out a loan that is secured on their house or property. This means that a loan is taken out with the understanding that the borrower's property or home is used as security for the loan. If the borrow fails to keep to the agreement, the lender may sell the borrower's home in order to pay back the loan. Because of this added security, the risk to the lender is reduced so the interest rate or APR offered on the loan is often lower.

When should you consolidate your Debts?

In theory, debt consolidation is often recommended when a person is paying other more expensive debts such as credit cards or cash loans. Credit cards usually carry a much higher or larger interest rate than many unsecured loans from banks. If you're in debt because you spend more than your income, is it a good idea to curb your spending before consolidating your debt. If you continue to spend more than your income after taking out a debt consolidation loan, your debts may get out of control.

If you're getting more and more into debt, try to speak to your financial advisor before contacting a lender to get another loan. Many people are tempted to consolidate their unsecured debt into secured debt by taking out a loan secured on their home. Although the monthly repayments for the secured loan may be lower, the total amount that you will have to pay in order to repay the loan will be much higher because of the longer repayment period. Also, some lenders will charge you early repayment penalties in addition to arrangement fees, broker fees and property survey fees.

If you're debt, start by curbing your spending so that you start to spend less than your income. Then begin paying off the more expensive debts first. These will usually be debts with higher APRs such as payday loans, cash loans and credit cards.

Debt Management and Getting Advice

There are a number of other alternatives to debt consolidation. Some debt management companies will recommend that the debt is eliminated through a settlement or debt payment plan. If you find the process of debt consolidation confusing, speak to a financial advisor first. Try to find out all you can about all of your options and get help if you can. The Citizens Advice Bureau (www.citizensadvice.org.uk) and the Office of Fair Trading (www.oft.gov.uk) are good places to start if you live in the UK.

Disclaimer: All information at this site is provided for information purposes only. Do not base any finance related decisions on this information. This is not financial advice and should not be used as such.