For people who have several loans and different repayment plans at various times of the month, the idea of taking out a debt consolidation loan, such as the ones from Evolution Money, may be appealing. This type of loan works by consolidating all of your debts together. Rather than paying back individual debts at different times, one loan is used to manage existing debts in a single monthly repayment.
As with any loan, there are lots of factors to consider before making any final decisions. A debt consolidation loan can be advantageous to people who may find it hard juggling repayments of several debts from various lenders, especially if they have several credit cards. It can be tricky remembering to make payments and keep track of what is owed, which could further increase debt levels.
By taking out one loan to pay off all of these individual debts, it can make it easier to budget and manage your finances on a monthly basis. You can close down your existing loan or credit card arrangements and streamline your debts to have just the one lender.
With this type of loan, you may also be able to pay the debt back over a longer time frame. This could reduce your monthly outgoings, which can help you to get back on track with your finances and, crucially, may provide the incentive for not getting into any further debt. Better still, if the loan has a lower rate of interest than your original debts, then you could even reduce the amount that you have to pay back.
If you can pay the loan off and stay debt-free, then this can go a long way to boosting your credit rating and proving that you are a responsible borrower.
All loans have pros and cons, and this type of loan is no exception, so you need to weigh up all of the risks and know what you are dealing with. It could be worth looking at your existing debts first to see what you can afford to pay back or if there are any outgoings that you can minimise to get your finances into better shape. Although it can prove worthwhile to some, a loan that consolidates your debts needs careful consideration.
Always seek expert advice on how to consolidate loans you might have to ensure that you do not end up piling up debts over an extended period of time. This could happen if the interest rate is higher than those of your original debts, so consider what you can afford and what the best option for you is. What you don’t want to be doing is paying more over the long term and adding to the amount that you already owe. Scrutinise interest rates and compare your options to get the best deal.
Avoid borrowing more money than you need, as this will only add to the burden of paying off your debts. Additionally, check to see if you will need to pay any early-repayment charges for your existing individual debts. Factor these into your calculations when deciding if a consolidated loan makes financial sense for you. Similarly, if the chance does arise to pay off your consolidated loan early, find out what sort of penalty charges might be imposed.
When you are wading through the options to consider how to consolidate loans you have, make sure that you understand everything that is involved and what it means for you. According to the BBC, these loans often come with payment protection insurance, so make sure that the terms are fair and cover you if you fall ill or are made redundant, for example.
When you take out a loan to consolidate your debts, this may be secured or unsecured. A secured loan may offer you a lower rate of interest and therefore could be tempting, but remember that it will usually be secured against your home. If you fall behind with any repayments, you run the risk of having your property repossessed, so think this through carefully before making any firm decision.
Warren Lee says
Hey Pauline. At one point I had so much unsecured credit card debt it was difficult keeping payments on time. It wasn’t that I couldn’t make the minimum monthly payments. I was just bad at setting up the payments. There were too many of them. Many of which were small amounts.
So, I did what I thought was best and consolidated my first unsecured debt load of $10,000 into a consolidation loan. The benefits were immediate. I had a lower interest rate. I had a fixed monthly payment for 36 months. I knew after 36 months the debt would be repaid and gone.
I saved thousands from the consolidation but I also learned a valuable lesson. It’s easy to fall into the credit card trap again. I had a lower monthly payment plus had all these credit limits available. I thought I could afford the minimum monthly payments in addition to the debt consolidation payment. The cycle began again.
My suggestion is to make sure you’ve identified your spending habits and your propensity to accumulate debt. Break those bad money habits before debt consolidation.
Debt consolidation is a tool to get you out of debt. It isn’t a way to free up credit card limits.
Jayson @ Monster Piggy Bank says
I think so Pauline that it’s better to resort to debt consolidation because the overall lower interest rate is an advantage of the debt consolidation loan that offers to consumers.
Petrish @ Debt Free Martini says
I think consolidated loans are good because you get to just pay one lender and most of the time with a lower interest rate so it can be a win-win situation.
M from There's Value says
I think debt consolidation loans can be a good thing, if you can get a lower rate like Warren Lee says above.
Unfortunately, they don’t always help if people are gernally bad at managing their money. They need to attack the costliest credit cards/loans and use the snowball effect to get rid of their debts. The main problem is attacking the psychology behind why they are in so much debt in the first place.
Mike Carlson says
Fantastic guide and it’s very reliable sources article. It’s very helpful and useful about debt consolidation is a good idea. Glad to read this. Thanks for sharing this article. Great post!
Alex V @ Eventus Financial says
Debt consolidation is a good idea if you keep your short term debt at a lower loan term compared to your home loan. Example:
If you have a 30 year term home loan and you are intending to consolidate a couple of credit cards and personal loans. Then make sure your bank or mortgage broker separate these shorter term debts into a separate mortgage split at a lower loan term to ensure they are paid off as soon as possible. If you consolidate these short term debts within your 30 year loan term then over the years you will pay more interest than you would have otherwise without consolidating them in the first place. At Eventus Financial we always recommend this second split for short term debt.
Delores Lyon says
Thanks for sharing this advice on when to consolidate your debt. I agree that it is important to weigh the pros and cons of the consolidation, especially if you will be paying this debt for a long amount of time. However, it is true that consolidation is great for making payments more easily.
Gerald Vonberger says
It’s really helpful to have an objective view of debt consolidation. I can see how it would be a good thing for certain people. I like what the article said about not borrowing more than you need. Doing that just continues the process of unmanageable debt. However, if you get a reasonable loan to get back on top of your debt, then consolidation can be a good thing.
You share important information about secured loans that people should be aware of before taking a risk against their home. Considering the decision carefully is essential, as you share.