Debt Consolidation Loans - Pros and Cons
Household Bills, Money Problems and High APR Personal Debt
Apr 9, 2009
Consumers take out a debt consolidation loan to consolidate personal debts, such as personal overdrafts, high APR credit card debt and small personal loans. Debt consolidation is performed to simplify family finances, lower household bills and reduce monthly repayments.
The Advantages of Debt Consolidation Loans
- Simplify household bills. Putting all personal debts under one roof with a debt consolidation loan helps to simplify household bills. A single monthly repayment also means there is less chance of getting bad credit and incurring late payment charges;
- Reduced monthly payments. A debt consolidation loan makes household bills more affordable as interest payments are lower and monthly repayments are spread over a longer term;
- Borrow more. A secured debt consolidation loan means that, subject to affordability, consumers can borrow in excess of £100,000. However, unsecured debt consolidation loans normally have an upper-limit of £15,000;
- Application process. The application process for a debt consolidation loan is quick and easy, particularly for those applying for an unsecured debt consolidation loan. There are also a number of brokers that will help those with a bad credit rating, although they will often a charge a fee;
- Lower interest rate. A best buy personal loan charges a lower rate of interest than high APR credit card debt and personal loans.
The Disadvantages of Debt Consolidation Loans
- Unsecured debt vs secured debt. Turning unsecured debts, such as personal loans, credit card debt and personal overdrafts, into secured debt is rarely a smart move. This rules out debt solutions and gives creditors additional powers to collect unpaid personal debts;
- Existing credit arrangements. Consumers that consolidate debt regularly fail to close down existing credit arrangements after doing so. This can result in the creation of new personal debt and additional money problems as there is a strong temptation to use them again;
- Bad credit. Consumers that accrued credit card debt and took out personal loans prior to getting bad credit may find that monthly repayments on personal debt become higher. Unsecured debt consolidation loans will attract a very high APR due to the risk of loan default;
- Longer term. In order to make household bills more affordable, consumers regularly take out debt consolidation loans over an increased term. Whilst choosing to consolidate debt does reduce monthly repayments, it also increases the amount of interest paid on personal debt;
- Home equity. Consumers with a bad credit rating will only be able to get a secured debt consolidation loan if sufficient home equity is available;
- Debt solutions. It may be better to tackle money problems and personal debts with a debt solution rather than a debt consolidation loan, particularly for those with a bad credit rating.
Whilst a debt consolidation loan undeniably helps to reduce household bills and minimise monthly repayments, turning unsecured debt into secured debt isn't a good move. However, an unsecured debt consolidation loan may be available to individuals that have a good credit rating. When choosing to consolidate debt, always remember to close down existing credit arrangements in order to avoid the creation of further personal debt.
Individuals that have signed-up to credit agreements prior to April 2007 should check to see whether an illegal credit card or unenforceable loan agreement is in place. This could lead to personal debt being written-off and the need for a debt consolidation loan negated.
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