The benefits of consolidation loans

by Ceri Harris12.01.2014

Debt consolidation loans may be of benefit to you if you are finding that a lot of your monthly outgoings are directed towards the repayment of a number of small debts.

You may, for example, have:

  • a credit card;
  • a small bank loan;
  • a store card;
  • some HP for a larger item of furniture.

None of these may be particularly big in themselves but taken together they may take up a sizable portion of your monthly income.

Another factor to consider is that store cards and credit cards tend to be fairly open-ended loans. They are a bit like a pot of money constantly available for you to dip into as and when you choose.

It can be very tempting to use these types of card and debts can quickly mount up.

The cost of borrowing

The cost of borrowing on loans and credit or store cards is obviously the interest that gets added on. Cards in particular often carry relatively high rates of interest and if you do not clear the balance each month, they may turn out to be a very expensive way of borrowing money.

As a general rule, any type of borrowing - and this includes consolidation loans - may have its own interest rate determined by things such as:

  • how much you wish to borrow and for how long;
  • is the loan secured or unsecured;
  • how good (or bad) your credit history is.

How a consolidation loan may help

Some types of lending are therefore more cost advantageous than others and some consolidation loans typically fall into this category.

They tend to be secured loans. A secured loan is one where one of your assets, typically your home, is used to guarantee the debt. Because this means that there is less risk for the loan provider, the interest rates may be more attractive.

The theory behind this type of borrowing is that a consolidation loan is big enough to allow you to repay all outstanding loans and clear card balances etc. You are then left with just one loan repayment to meet each month, which is lower than the total repayments you had to find previously.

Before opting for a consolidation loan, you may need to:

  • ensure that your new repayment will work out to be less per month - and don’t forget that there may be early repayment penalties on existing loans which may need to be taken into account;
  • avoid the temptation of running up other debt again on cards etc.

If you are interested in getting your finances back under your own control, our service can advise you on whether or not credit consolidation loans are the answer for you