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Issue No: 3  Article
Title:  Debt Consolidation Tips
Date:  23-02-2012

Consolidating your debts can make good sense - if done the correct way...

Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful. A consolidation loan may not always be your best option if you don't approach it correctly in the first place. Just as important, is how you manage your finances after consolidating your debts.

Overall, a debt consolidation loan - done correctly - may save you money and be stuctured to benefit your overall needs. 

Before getting a consolidation loan

Before you decide on a debt consolidation loan, understand your current debts and what your overall objective you want to achieve actually is. Your objectives may be multi purpose. 

These could include:
  • What interest rate are you currently paying on each debt and how much do you owe.
  • What are your current monthly payments on all loans at present and their remaining repayment terms.
  • Are you trying to reduce the overall interest being paid or reduce your monthly outlay - or both?
  • What loan options do you have to achieve a debt consolidation.
  • Can you possibly make extra payments to pay your debt consolidation loan off sooner when possible. 
  • Can you eliminate the future need for further expensive loans like credit cards with better alternatives.

Once you have a clearer understanding of your needs then discussing the different loan options available will make more sense to you. For example, you may be able to use the equity in your home to consolidate your debts into a lower cost rate over a more favourable term. With the option to make extra payments you can avoid the risk of consolidating your debts at a lower rate with the disadvantage of simply spreading the debt over a very long term.  

Reasons to consider a consolidation loan

Used carefully, a consolidation loan can help to put you back in control of your finances. The advantages can include:
  • A lower rate of interest – longer-term consolidation loans may be better than short-term borrowing.
  • Your monthly payments might be lower.
  • Knowing when you'll finish paying off the debt.
  • You'll only have to make a single payment each month.
  • You'll only deal with one lender.
  • It may stop you falling behind on payments and getting a bad credit rating.
  • Which debts to pay off first.

Possible disadvantages of consolidation loans

Possible disadvantages to a consolidation loan include:
  • You could end up paying more overall and over a longer period.
  • You may pay extra charges for discharging current loans with other lenders.
  • if you have a poor credit rating it may be difficult to qualify for a new loan.
  • If you don’t pay off your existing debts, you may find it hard to make repayments on top of the new loan.

How to choose a consolidation loan

Make sure you understand all the terms and conditions of the loan and that you can afford to keep up the payments on your debt consolidation loan. Make sure any loan offer allows you to achieve your original objectives.

  • How long you'll be making repayments and how much you'll pay back in total.
  • The interest rate and whether it can change.
  • What the monthly repayments are and can you make extra payment amounts.
  • Any penalties or costs you'll have to pay if you want to repay it early.
  • What happens if it's secured on your home and you can't keep up the repayments.

Once you've arranged the loan, aim to keep your finances under tight control - for example, cut up your credit cards and don't let the debt build up again. Be aware that the lender may put pressure on you to borrow more by extending the loan.